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Accounts in Theory and Practice, THE ARTHUR YOUNG ACCOUNTING COLLECTION
Accounts in Theory and Practice, THE ARTHUR YOUNG ACCOUNTING COLLECTION
ARTHUR YOUNG
ACCOUNTING
COLLECTION
Graduate School of
Business Administration
Library of the
University of
Cahfomia
Los Angeles
This book
is
DUE
on the
below
192b
^ 19281
1926
MKi
SOUTHERN BRANCH,
iJNIVERSITY OF CALIFORNIA,
LIBRARY,
i-OS
ANGELES. CALIF.
AnMnl^tra%io%
Business
Oritduat* School of
Graduate
^^^^^^^^^y ,^ California
Calif oita*
Los Angeles 24.
^^6
Corporation
http://www.archive.org/details/accountsintheoryOOsaliiala
ACCOUNTS
IN
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ACCOUNTS
IN
BY
EARL
ArtrtlSTANT
SALIERS, Ph.D.
A.
First Edition
&
BOUVERIE
1920
57159
ST., E. C. 4
Inc.
I>A
Bus. AdmiiB.
Library
HF
5625
SI6
I
r-
-Go
D. V.
S.
L.
S.
J.
M. D.
S.
PREFACE
The purpose
principles of accounts.
The author
application.
own
realizes that
An
vx
\v.
columns,
may
equally well.
started after the study of chapter III has been completed (See
page 21).
in-
The author
is
valuation,
ledger
will treat of
the
analysis,
vii
consolidations,
branch
house
vm
PREFACE
It
is
i.e.,
that
first
half-year's
Each
book is
and examination purposes.
for review
of
To
facilitate
review work
many
He
is
especially
corrections
and
J.
criticisms as readers
may
wish to
Earl
offer.
A. Saliers.
CONTENTS
Page
VII
Preface
PART
Fundamental Principles
Chapter
I.
il.
III.
IV.
V.
VI.
VII.
VIII.
IX.
X.
XI.
XII.
The Purpose
of Accounts
Recording Financial Transactions
Recording Financial Transactions (Continued)
The Functional Classification of Transactions
Functional Classification of Transactions Illustrated ...
Interpretation of Ledger Accounts
Recording Financial Transactions Practice
Recording Financial Transactions Practice
The Theory of Accruals and of Deferred Charges
Accruals and Deferred Charges Practice
...
Depreciation, Bad Debts, and Valuation Reserves
Depreciation, Bad Debts, and Valuation Reserves Prac-
....
8
14
22
29
35
44
55
59
65
69
81
tice
PART
II
Partnership Accounting
XIII.
Special Considerations
Partnership Accounting Practice
The Partnership
XIV. Theory
XV.
87
92
of Partnership Accounting
101
PART
III
105
114
.
.119
126
129
139
142
PART IV
Corporation Accounting
....
....
145
155
159
167
173
180
186
CONTENTS
PART V
Financial Statements
Chapteh
XXX.
XXXI.
XXXII.
XXXIII.
Page
Construction and Interpretation of the Income Statement 191
The Income Statement Illustrated
202
Construction and Interpretation of the Balance Sheet
208
Construction and Interpretation of the Balance Sheet
.
{Continued)
PART
218
VI
XXXIV. Department
XXXV.
Accounting
Practice
Practice (Continued)
Department Accounting
Department Accounting
XXXVI.
XXXVII. Manufacturing Accounting
XXXVIII. Manufacturing Accounting
{Continued)
XXXIX.
Appendix
Index
225
231
247
251
260
269
273
281
288
297
FUNDAMENTAL PRINCIPLES
CHAPTER
Scientific
Modern Methods of Production. The past century has witnessed a remarkable growth in the productive capacity of most
This growth has been accompanied by such alterahave been necessary
the
new
methods
of
and distribution.
with
production
cope
to
Along with the increase in wealth made possible by machine
methods, division of labor, etc., there has gone a concentration
of that wealth, if not in the ownership of a comparatively few
The man who, had he lived a
persons, at least in their control.
century ago, would have employed his limited means in constructing a workshop in which he would have become the master
workman and surrounded himself with a few journeymen and
apprentices, is likely, today, to become one of several hundred
or several thousand stockholders or bondholders in a corporation
with assets totaling millions of dollars and employees numbered
in thousands.
Under the old conditions, when each capitalist was also a
workman and was enabled to supervise personally all the details
countries.
wide and competition was not as keen as they are today. The
credit system, which underlies nearly all modern enterprise,
was
in its infancy.
Railroads, the telegraph, the telephone,
and
steamship,
those
conveniences which, by "abridging
the
distance," facilitate commercial intercourse over long distances,
still
fifth
make imperative
Chief among these are
tion that
(a)
(b)
(c)
(/)
ig)
Profits
()
of
demand
Valuation.
Taxation.
Investments.
(d)
the
Price making and competitwo inseparable factors in business. Competition usually brings vigorous and healthful activity into industry and
commerce. But upon some enterprises its effects are destructive, especially upon those which are without any adequate knowledge of their costs and expenses and which consequently are
unable to place prices upon their products except by adopting
the prices set by their competitors, or by attempting to underbid
Price
tion are
their competitors.
The
evils
of
If
commodi-
it is
entirely.
much more
company
better
Although
see Chapter
XL.
The property
and
for
rate-making.
Public
utilities,
i.e.,
railroads, street
work
is
It is
usually done
out
of the reasons
If
of valuation is
Investing
is
enterprise.
who become
company.
The amount
increasing and
is
management
of
the
6
All
who
invest their
money
management and
must have accurate
in enterprises the
As the science of investments becomes better understood the securities of companies which tolerate any but the
most efficient methods of accounts and control will go begging
for a market, while those which give to the investing public the
enterprises.
Determination and
Distribution.
The purpose of
all
acter,
indefinite
and hazardous.
division of profits.
secured a mastery
purpose of this book
to afford such knowledge of accounts as a fair amount of study
should secure. Furthermore it will be our purpose to subordinate
the consideration of unimporcant detail and form to the consideration of those principles which, with variation as to details,
apply most universally.
of the principles of this science.
first
It is the
CHAPTER
II
and
cash
sales.
in
many
Advantages
of Credit.
There
exceed
are
its
convenience,
advantages
outweigh its disadvantages. Although dangerous when carelessly
employed, the evil consequences of its misuse can be minimized
by taking proper
cash.
Its
known
Two Kinds
as credit instruments.
of Transactions.
Cash
$100.00
To
On
$100.00
Sales
Allen,
John Allen
To
By
$100 00
.
above, and a
sold
$100.00
Sales
we
little
name
of the person
name
of the
"charged,"
commodity
name
cash, or the
thing sold.
entries, thus.
Journal
Df'bit
Date
Explanations
Cash
To
Amounts
Amounts
100.00
100.00
Sales
John Allen
To
Credit
Sales
100.00
100 00
10
times and places. Probably its development into the form shown
above was a slow one. Any record may vary somewhat in form,
it is
designer.
its
is,
and
Any
Before
in the Journal.
two
essential elements,
it is
transaction
recorded
it
one a debit or
must be
is
placed on the
left is
in
be recorded
split
up
into its
left side
may
That element
of the
credit element.
$100.
Meaning
of
must not be
is,
(c)
gains made.
(6)
wealth surrendered,
Debits and Credits Illustrated. As an illustration of the foregoing propositions, consider the following journal entries:
Case
Cash
{i.e.,
To Sales
To record a
Rent
(i.e.,
$ 100.00
expense incurred)
and Loss
(i.e.,
loss incurred)
30.00
rule, debit or
$ 1,000.00
$1,000.00
destruction of building
by
fire.
mulate the
30 00
of rent in cash.
To Building (destroyed)
To record loss resulting from
By
100.00
sale of
To Cash
To record payment
Profit
wealth received)
Case
II.
$200.00
Purchases
$200 00
.
Allen.
John Allen
$100.00
may
$100 00
.
be expressed thus:
John Allen
To
To
$100.00
$90.00
10.00
(i.e.,
By
formulate the
rule,
2.
Wealth received
Expenses incurred
3.
Loss incurred
4.
5.
Debts incurred
Wealth surrendered
6.
Profit
1.
made
"i
which are
credits.
2.
3.
and
we can
for debits
5.
6.
Credit profits
4.
These are
made by
us.
week proceeds as
follows:
12
Sells
Pays rent
for
week
$15.
trans-
them
will
show:
$400 00
.
$400 00
.
$100 00
.
$ 90 00
10 00
.
To
To
and Loss
(loss
incurred
$ 40 00
10 00
.
Rule
To Sales (wealth surrendered Rule
Profit
3)
$ 50 00
4)
Profit
and Loss
(loss
incurred Rule
To
$100 00
3)
$100 00
4)
$150 00
1)
surrendered Rule 4)
Profit and Loss (gains made
Rule 6)
To record sale, and profit made.
Profit and Loss (expense incurred
Rule 2)
To Cash (wealth surrendered Rule 4)
To record rent payment, or expense incurred.
$100 00
50 00
Sales (wealth
$ 15 00
.
$ 15 00
.
and
profits credited, as
shown above.
If desirable to specialize
For
make
When
made
13
it is
well
own mind
may
at
be made.
and
losses occur
increased profits.
CHAPTER
III
We
Those
Those
Those
2.
in
in
threefold basis,
Those
1.
fe
Co
$400.00
and Loss
$100.00
To Sales
RoUo
To Sales
Profit
Those
2.
in
$ 100 00
,
$150.00
and Loss
which cash enters
$100.00
50.00
as a receipt:
Cash
$100.00
To
$ 90.00
10.00
Sales
Profit
and
loss
Cash
Profit
this
$400.00
To Meyer
O.
on
in
Purchases
Profit
12)
we have:
$ 40.00
10.00
and Loss
To
$ 50.00
Sales
$ 15.00
$ 15 00
.
two
possible
14
15
may
We
Cash Book.
or the
Cash Journal
(or
Book)
Month
The
Day
Explanation
Month
Amt.
l(
Sales
100
Sales
40
same
Day
Explanations
Amt.
as those
Expense
shown on page
15
12,
but note
that each transaction occupies but one line in the Cash Journal,
lines
were occupied, the upper for the debit item and the lower for
the credit item. This economizing of space and work is possible
because the entries on the left page in the Cash Journal are
exclusively those representing cash receipts or debits, while the
by a process explained
Then
at
on
in this book, the cost of all goods sold during the accounting
period is ascertained thus arriving at the same result, namely,
later
16
made on
much
less labor.
Had
$40.00
To
instead
$40.00
Cash
Profit
$40.00
10.00
and Loss
To
$50 00
When we
selling price,
affect.
"Account" Defined.
An
"account"
is
a statement showing
the various items, in dollars and cents, which affect the value of
Function of the Ledger. To provide a record in which transmay be grouped according to their influence on accounts,
actions
17
and gains
as the re-
has as
liabilities,
&
an obligation to Meyer
We
made some
He
He
gains.
If
12.
we rearrange these transactions on the basis of
accounts affected, thus securing a functional classification, we
have
Cash
Purchases
Debited
Credited
$100.00
40.00
400.00
$ 15.00
& Co
Meyer
O. Rollo
10.00
100.00
15.00
150.00
Totals
$815.00
Profit
and Loss
100.00
50.00
100.00
90.00
400.00
10.00
50.00
$815.00
Here we have the transactions classified on the basis of funcNote that in debiting Profit and Loss no distinction is
tion.
made between expenses and losses. This defect might be
obviated by setting up several accounts and thus subdividing
the Profit and Loss account, which is here made sufficiently
The subinclusive to cover all expenses, losses, and gains.
divisions may. be as follows:
Debited
General Expense
^^^
100.00
{
Gains.
(
3
Credited]
$ 15 00
1000
$10.00
50.00
18
Two
Classes of Accounts.
study
of the
above
After
this
may
be desirable.
make obvious
of as great subdivision
and
classification as
which
exists
Liabilities increased
1.
Meyer
& Co
$400.00
Assets decreased:
None
00.00
$400 00
Liabilities decreased:
None
$ 00 00
.
Assets increased:
1.
Cash
2.
Merchandise*
3.
O.
125.00
60.00
150.00
RoUo
$335 00
Net decrease
$ 65.00
of proprietorship
made
in business
may
rise to
The
is
used to designate
and the adjec"nominal" to refer to those accounts which record the changes
which the real accounts undergo during an accounting period.
Therefore real accounts record assets and liabilities, and nominal
liabilities,
tive
Found by deducting
19
shown
not show
how
and
The distinction
Significance of Real and Nominal Accounts.
between real and nominal accounts must be thoroughly grasped.
Every item entered in the Journals finds its way into an account
of one kind or the other, or else into one which contains both
nominal and real elements, which is properly termed a mixed
account. To illustrate the meaning of mixed accounts, assume
that O. Rollo, whose account stands charged with $150, is able
The remaining $50 is loss,
to pay only $100, in settlement.
but it stands in an account which also records an asset of $100.
We have both a real or asset item of $100 and a nominal or loss
item of $50 in the same account, so that such an account is
rightly termed "mixed."
When this condition arises it is necessary to divide the account into its real and nominal elements
in order to obtain that classification of all accounts into nominal
and real which is essential to the work of making an accurate
statement of losses, expenses, and gains, and another of assets and
liabilities.
We
Illustrated.
grouped chronologically
in
the
20
Ledger
Dr.
Cr.
Cash
100.00
40.00
Purchases
400. 00
15.00
100.00
60.00
100.00
90.00
Sales
400.00
Profit
10.00
50.00
10.00
100.00
J5.00
O. RoUo
150.001
the
mode
of recording transactions
later.
is
the Journals, it is desirable to follow a definite procedure in transferring this information from the Journals to the
Ledger. This procedure is called "posting." In posting it is
not only necessary to make a rearrangement of the items in
order to form the functional record, but it is necessary to make
such notations in both the chronological and the functional
records
records,
i.e.,
21
page from which they are derived in the Journals will be shown
Ledger and also that the page to which they are posted in
the Ledger will be shown in the Journals. This result is secured
by providing folio (meaning page) columns in both Journals and
Ledger for the purpose of receiving figures designating the page
of the complementary record to which or from which, as the case
in the
may
made.
The
a matter of convenience.
is
it
indicated
by an "F."
An
Chapters IV,
and VI.
CHAPTER
IV
of Interpretation.
Financial
of routine operations.
It does not include the work of contriving
the records, which precedes their use. Thus accounting precedes
and follows bookkeeping. Acting synthetically or constructively,
keeping
fills
process.
and
(6)
An
was presented
in
when they
Chapter
III.
It
that a debit means one or more of three things, (1) wealth received,
may
consequences:
1.
Liabilities increased.
2.
LiabiUties decreased.
3.
Assets increased.
4.
Assets decreased.
22
result in
any
of four ultimate
and Gains.
23
It follows that
in the assets
assets are
is
liabilities
is
If,
amount
to $5,000, the
We
then say that his net worth, or capital, is $5,000. But if one
begins business with $10,000 in assets and no liabilities, his
which figure also expresses
interest is the total value of the assets
his net worth or capital.
Capital or net worth is the excess of
the value of the assets over the liabilities. This may be expressed in the form of an equation, thus
Assets
Liabilities
or Assets
Capital-j-Liabilities
or Liabilities
or Capital
If assets
becomes:
Assets
Assets
liabilities
Capital
Capital
Liabilities
24
Assets, $10,000
Statement of Assets,
a set of books
liabilities,
cash
is
and
Liabilities
capital.
The
then,
Capital, $10,000
and
make
necessary to
it is
liabilities,
Capital.
Before opening
simplest condition
Liabilities,
and
liabilities, his
Liabilities
$8,000
that in which
Thus
Grant Atkins, as
Capital,
Assets
Cash
is
if
at July 2, 1917
and Capital
Capital
$8,000
$8,000
But
if,
$8,000
$5,000, store
and
lot,
Grant
statement
$9,000, furniture
statement reads:
Statement of Assets,
Liabilities,
and
Capital,
Grant Atkins, as
Assets
Cash
at July 2,
1917
Liabilities
$ 8,000
Inventory
None
$00,000
5,000
9,000
500
Capital
Grant Atkins
22,500
$22,500
$22,500
Note that
this is
a functional
classi-
This
is
so because
as follows:
25
July
1917
2,
Cash
Inventory
To Grant
Arrangement
of
8,000. oq
5,000.00
9,000,00
500.00
22,500 00
Atkins, Capital
must
entry,
The word
in the
column of the
used because sundry items were charged
capital account of
Grant Atkins,
is
26
page
1917
Capi-
2 Sundries
July
tal
22,500,00
Cash
page 2
1917
July
Capital,
Grant Atkins
8,000 00
page 3
Merchandise
1917
July
F
Capital,
Grant Atkins
Jll 5,000
00
page 4
July
Capital,
Grant Atkins
9,ooo:oo
page 5
1917
July
F
2 Capital,
Grant Atkins Jl
"Cash"
in the
500 00
Opening Entry.
Although
all
cash transactions
it is
best to bring
the cash invested into the opening journal entry with the other
assets.
Where
It
may
Cash Journal,
if
desirable.
July
8,000 00
27
1/
posted.
in the folio
If,
Journal also.
Entries for Routine Transactions. All entries in the Journals
having been posted or checked off, the books now await the
entries which arise from the ordinary routine of business.
These
will record chiefly purchases, sales, losses, profits and expenses.
profits.
The number
beyond
growth
control,
it
of these
two
The number
is
to
furnish
It
a functional classification,
is
to
that extent
negatived.
28
Profits:
The subdivision
of accounts is an
however, by practical considerations.
A small concern naturally demands a less minute subdivision of accounts than a large one having a great variety of
expenses and many sources of profit. Ledger accounts may be
Subdivision of Accounts.
endless process.
It is limited,
CHAPtER V
FUNCTIONAL
Accounting
month
OF TRANSACTIONS
ILLUSTRATED
CLASSII- ICATION
Let
Procedure.^
of July, 1917,
us
Grant Atkins
carries
2.
Buys merchandise on account from Baxter and Company,
Pays rent for month, $35. Sells merchandise on account to Mr.
Buckley, $15, and to Aaron Cole, $17. Buys stable supplies, sufficient to
last 2 months, $40, cash.
(3) Buys merchandise on account from Baker Wholesale Company,
July
$400.
$725.00.
(6)
Sells
on account to
L. Laurens, $23.00.
(7)
Sells
$12.20,
Pays
(17) S.
(18)
(21)
The cash sales are given weekly, the daily cash sales having
been kept on subordinate records to avoid making daily entries
for this item in the Cash Journal.
Below are shown the Journals
and Ledger of Grant Atkins as they appear at the close of business
July 31, 1917, after all transactions are entered and posted:
29
30
Grant Atkins
2,
1917
this
retail grocer,
capital, as follows:
Cash
8,000 00
Inventory
5,000 00
9,000 ool
500
22,500 00
400 00
400 00
Mr. Buckley
To
15 00
15,00
Sales
Aaron Cole
To
oo|
17 00
17 00
Sales
July 3
Purchases
725 30
To Baker Wholesale Co
72530
July 6
L. Laurens
To
23 00
23 00
Sales
July 7
M. Buckley
To Sales
12 20
Sherman
17 00
S.
To
1220
Sales
17;00
July 10
Purchases
To Milton
370 00
Company
370 00
July 12
James Whittlesey
To
27 00
27 00
Sales
July 18
55 00
Purchases
To Armstrong Supply Co
55 00
July 23
Oscar Morgan
To
14 00
1400
Sales
July 27
James Whittlesey
To
Sales
14 20
.
14 20
31
Cash Dr.
1917
July
Cr.
1917
Sundries
8,000 00
Sales (cash)
M. Buckley
(in full)
360 92
Sales (cash)
S.
Sherman (on
count)
Sales (cash)
Sales (cash)
348147
27,20
ac-
1000
335120
397 20
July
35100
40 00
&
Co.
bill,
400
Wages: Bookpr.. 30
Clerk.... 25
Delivery boy 15
70 00
16 Miscellaneous expense
10,00
(advertising)
Misc. expense
bill July 3
31 Wages: Bookpr.
30
Clerk.... 25
Delivery boy 15
.
70 00
Fuel & light (light for
mo.)
Misc. exp
Cash Dr
2 9,478 99
Balance.
8,110 52
Cash Cr
Balance
5:60
6 20
2 1,368 47
8,110 52
I
Aug.
9,478 99
32
page
al
Gr
an' t Atkins
1917
July
By
Jl
Sundries
22,600 00
page 2
C
1917
July
To
31
Sundries
C.J.I 9.478 99
8,100.52
ash
1917
July 31
By
Sundries
C.J.I
1.368 47
page 3
Inv en tory
1917
July
To
Sundries
Jl
5,000 00
page 3
Pure ha ses
1917
July
2
3
10
18
Jl
400 00
Jl
Jl
Jl
725 30
370 00
55 00
1.550.30
page 3
Sa
les
1917
July
2
2
7
12
16
21
23
27
31
By
By
By
By
By
By
By
By
By
By
By
By
M. Buckley..
Aarou Cole.
L. Laurens.
Cash
C.J.I
M. Buckley...
S. S.
Sherman.
Whittlesey..
J.
Cash
Cash
O.
J.
Jl
Jl
Jl
Morgan
Whittlesey..
Cash
1,581.19
Jl
Jl
Jl
C.J.I
C.J.I
J2
J2
J2
15 00
17 00
23 00
348 47
12 20
17 00
27 00
360 92
335 20
14 00
14 20
397 20
..
33
Rent Expense
1917
July
To Cash
C.J.I 35.00
page 101
Miscellaneous Expense
1917
July
To
To
23 To
31 To
6
16
Cash
Cash..
Cash..
Cash
3.10
10.00
C.J.I
3.27
6.20
C.J.I
C.J.I
C.J.I
22.57
page 102
Wages Expense
1917
July 14
31
To Cash....
To Cash ....
C.J.I
C.J.I
70.00
70.00
140.00
page 103
Fuel and Light Expense
1917
July 31
To Cash ....
C.J.I
5 60
.
page 40
Baxter
&
Co.
1917
1917
July 10
To Cash...
C.J.I 400.00
July
By
Purchases.
J. 1
400.00
page 41
1917
July 24
To Cash
C.J.I
725.30
By
Purchases.
J.l
725.30
page 42
July 10
By
Purchases.
J.l
370.00
page 43
Purchases.
J.l
65.00
July
Milton Co.
1917
July 18
By
M. Buckley
1917
1917
July
2 ToSalea
7
3
To
Sales
J.l
J.l
15.00
12.20
July 11
By Cash.
..
C.J.I
27.20
34
page 81
Aaron Cole
1917
July
To
Sales
J.l
17.00
page 82
L.
Laurens
1917
July 6
To
Sales
J.l
23.00
page 83
S.
Sherman
1917
1917
July
To
Sales
J.l
17.00
July 17
By Cash.
..
C.J.I
10.00
7.00
page 84
James Whittlesey
1917
July 12
27
To
To
Sales
J.l
Sales
41.20
J.2
27.00
14.20
page 85
Oscar Morgan
1917
July 23
To
Sales
J.2
14.00
CHAPTER
VI
The
ledger accounts
They
shown
in
represent
grouped into
in another,
elements.
An
below.
is
36
36
Trial Balance,
Grant Atkins, as
CapitalGrant Atkins
Cash
1< Store and Lot
Furniture and Fixtures
at July 31,
1917
$22,500. 00
8,110.52
9.000.00
500.00
40.00
Stable Supplies
Rent Expense
35. 00
Purchases
1,550. 30
Sales
1,581 19
Miscellaneous Expense
Inventory, July 2, 1917
22 57
5,000.00
140 00
5 60
.
Wages Expense
Co
Milton
Armstrong Supply Co
370. 00
55 00
.
Aaron Cole
L.
17.00
23 00
7 00
Laurens
Sherman
James Whittlesey
Oscar Morgan
S.
41 .20
14 00
.
$24,506.19 $24,506. 19
namely, the equality of debits and credits. This equality persists in the Ledger, for all debits in the Journals become debits
in the Ledger, and all credits in the Journals become credits
in the Ledger.
Although we take only the balances of the ledger
accounts into the trial balance, these are sufficient because the
total of the debit balances will equal the total of the credit
balances if the posting is done correctly and no omissions are
made. The balances of the two accounts are the uncancelled
portions. Since the cancelled parts of the accounts are equal,
debit for credit,
it
sum
veniently ignored.
An
The
examination of the
first of
trial
37
laneous real and mixed accounts, but excludes accounts receivable and accounts payable.
The first and second divisions are
of the
it is
It contains
taken.
most
is
of the
the next
Mixed Accounts.
We
at the
same
price.
We
sell
We
Inventory (old)
ToSundries
2.00
Purchases
To Cash
2.00
Sales
By Cash
57159
3.00
38
thus:i
Profit
and Loss
$2.00
To Inventory
Profit
$2 00
(old)
and Loss
$2.00
To Purchases
$2.00
$3.00
Sales
To
Profit
and Loss
$3.00
Inventory (new)
To
Profit
When
$2 00
.
and Loss
$2 00
.
Profit
To Inventory
To Purchases
and Loss
2.00
2 00
(old)
By
By
Sales
Inventory (new)
3.00
2 00
.
Inventory (new)
To
Profit
The
and Loss
profit
and
2.00
loss
is
profit
and
39
loss are as
follows
Profit
and Loss
$1,550.30
To Purchases
$1,550.30
$1,581 19
Sales
To
Profit
To Inventory
Inventory (new)
$1,581.19
$5,000.00
$5,000.00
(old)
$5,400 00
.
To
Profit
To
$5,400.00
$
223. 17
Stable Supplies
20.00
35.00
22.57
140.00
5.60
Rent Expense
Miscellaneous Expense
Wages
Fuel and Light
all
F
1917
1917
To Baxter &
Co
Jl
To Baker Whsl
Co
Jl
To Milton Co. 'jl
To Armstrong
July
July 31
By
400
Profit
Loss
and
J? 1,550 30
725
370
Supply Co....! Jl
65
1,550 30
1,550 30
July
The
2|
p
r
pMT By
and
and Loss Account. There now remain open
the
rn
To Cash.
Profit
.|
C.J.I |35i00||july 31
Profit
Loasl.
.|
|35|00
in
real accounts,
40
may
or
open
this
Profit
and Loss
1917
1917
31
July
To Purchases
To Inventory
1,550 30
By Sales ....
By Inventory
1,581 19
(New)
5,000 00
(Old)
To
July 31
5,400 00
Stable Sup-
20 00
plies
To Rent Ex35 00
pense
Misc. Expense
To
22 57
To Wages Expense
140 00
To Fuel and
Light Expense
Balance,
6 60
Net
Profit Carried
to Capital.
207 72
6,981 19
6,981 19
Disposition of Net
F*rofit.
the
month
Profit
which
is
of July.
and Loss
To Grant Atkins
To
When
as
$207.72
$207.72
Capital
month
to capital account.
becomes:
and
loss
account
capital account of
is
closed,
Grant Atkins
41
Capital
1017
By
By
Sundries
Profit
and Loss
22,500.00
207 72
Jl
.
J ( ?)
if
desirable,
Grant Atkins
1917
Capital
1917
22,707.72
22,500.00
July l,By Sundriesll.
207.72
July 31, Profit and Loss J(?)
22.707.27
22. 707.72
Aug.
By
1,
22,707.72
and
in this case
All
Liabilities
Fixed Assets
StoreandLot
Furniture and
None
$9,000.00
Cash
Accounts Receivable.
Inventory, July 31
Deferred Charges
Stable Supplies
8,110.52
102 20
5,400 00
Current Liabilities
Accounts Payable.
00.00
..
425.00
Capital
20. 00
$23,132.72
may
Grant Atkins
22,707 72
.
$23,132.72
and
loss
account
500.00
Fixtures
Current Assets
The
and Capital
Fixed Liabilities
42
ment."
Below
is
shown a
profit
and
loss
31,
1917.
This should be carefully compared with the profit and loss accounts given above, and the rearrangement of the items noted.
Profit
and Loss Statement, Grant Atkins, for the Month Ending July 31, 1917
Sales for
Month
Deduct Cost
$1,.581
of
Inventory, July
Month
$6,550.30
5,400.00
Rent
Wages
Fuel and Light
35.00
140.00
5 60
20.00
22.57
$1,150.30
$
430.89
223.17
207.72
Stable Supplies
Miscellaneous
Profit for
19
$6,000.00
1,550 30
Purchases During
Net
Goods Sold
Month
Thus
we
2.
Taking the
5.
loss
loss statement.
The
of
it.
43
two most
and
loss
essential
The
misdirected projects.
plied
by the Ledger
Next to accuracy
is
most important
requirement.
and promptly. The month has become the most popular period
time upon which to base these statements. It is not so long
but that any unfavorable tendencies can be discovered before
much injury results from them. It is sufficiently long to allow
influences and tendencies to materialize considerably, to make
an interpretation of them reliable, and yet not interfere too
much with daily oflUce routine by the additional labor entailed.
of
CHAPTER
VII
mind by the
formance
manner
as
is
of
is
The
per-
It is for this
If this practice
work
is
to do
In no instance
will practice
problems
As more
will
44
45
Page
1.
Date
Explanation
Dr.
Cr.
1919
i
1
46
3
i
Pk
^
6
1
O
M
an
i
^.2
4^
O
s
08
H-t
o.
>.
ti
o
03
tM
o>
s
a
a
1
2.
Colu
ash
u
*
Q
M
CO
^.i
'3
'
cS
o.
1
Date
age
Ph
"^
47
Date
Explanation
Ledger, A. B. Gray
Amt.
Date
Explanation
Ami.
'
finished the first page of the Ledger open the sheet and
same notations on the inner left hand page, then on the
inner right hand page, and finally on the outer or fourth page,
but paging them respectively "Page 2," "Page 3," and "Page 4."
You are now ready to enter the transactions of A. B. Gray
for the month of September, as follows:
Having
make
the
Diary of Events
Sept.
1,
A. B. Gray
1919.
Sept., 1919.
A. B.
retail
semi-monthly.
48
to enter
thus(
it in
1/ )
thus in
General Journal
Date
Explanation
Dr.
Cr
1919
Sept
Gray
A. B.
this
retail
grocery
Cash
v^
4,000 00
4,000 00
A. B. Gray, Capital
Cash Journal
Date
(left
page)
Explanation
Amt. columns
1919
Sept.
Ij
4,000 00
A. B. Gray, Capital.
The payments of $50. Sept. rent and $400 for horse and wagon
made on the right side of the Cash Book, thus:
are next
Cash Journal
Date
(right page)
Amt. columns
Explanation
1919
Expense
Sept.
Sept. rent
Delivery Equipment
The remainder
2.
6000
400 00
is
mere memoranda
in the books.
Co. mdse.
on
$500.00,
account, 30 days.
Note.
Make
immediately below
as follows:
Purchases
Cloverdale Wholesale
On acct. 30 da.
$500. 00
Co
$500 00
.
Sells to T.
M.
Phillips,
on account, mdse.
$8.75,
49
and to Andrew
Note.
These
are
entries
made
in
General Journal,
the
as follows
Sept. 3
T.
M.
$8. 75
Phillips
$8.75
Sales
Andrew Fry
$11 43
.
$11.43
Sales
Oldmore Manufacturing Co
For display case bought on acct. 10
The student
$50.00
$50 00
.
da.
6.
Sells
we
proceed.
S.
Thomas, on account,
mdse., $7.27.
The cash
sale is entered
on the
left side of
thus:
Sept. 6
For
S.
Sept.
$15.22
Sales
in the first
money column.
8.
cash.
For the
first
6.
Sept. 9.
50
The
on account
sales
will
Sept. 9
M. Phillipsbill of Sept. 3
Gray pays telephone bill for
to J.
$8. 75
T.
Sept. 10.
Sells
Buys mdse., on
J.
Cash
sales,
2).
8).
sales,
Note.
entered on the
Sept. 13.
Myers pays
is
S.
Thomas pays
bill of
Sept.
9,
bill
Sept.
6,
$7.27.
$50. 00
(See Sept. 9.)
R. T.
first
Delivery boy
Clerk
$15.00
25.00
30. 00
Bookkeeper
He
also
use.
of salaries
thus:
(
Sept. 13 Expense
]
I
The
Delivery boy
Clerk
Bookkeeper
Sept. 13
of
A. B. Gray, Withdrawals
Sept. 15.
3,
money column.
Sept.
$15.00
25.00
30. 00 $70. 00
Cash
sales,
bill of
9).
Sept. 16.
Cash sales, $40.00 (see Sept. 15). Sells on account to S.
Thomas, $14.00; to T. M. Phillips, $8.00; to R. T. Myers, $5.20 (see Sept.
10).
Sept.
account,
17.
2%
Sept. 18.
on
M.
Cash
of Sept. 9.
due
in 10 days, in
51
payment
Pays $10.00
of bill
for repairs
Note.
in payment of an account.
done the personal account of the giver is credited
and "Notes Receivable" charged. This entry is made in the
General Journal thus:
When
this is
Notes Receivable
Sept. 18.
$6. 42
M. PhiUips
$6.42
Note due in 10 da. in payment of bill of Sept. 9.
Sept. 19.
Sells on account to D. Hathaway, mdse. $7.20; to R. T. Myers,
$3.20 (see Sept. 16).
Buys 6 chairs for store, cash, $30.00 (see Sept. 5).
Sept. 20.
Cash sales, $45.00 (see Sept. 18). Buys mdse. from Cloverdale
Wholesale Co., $600.00, 2% 10 days, net 30 days (see Sept. 17).
Sept. 22.
Sells mdse. to S. Adams, $15.00.
Adams gives note for 30
days for purchases. Cash sales, $28.50 (see Sept. 20). Miscellaneous
expense, $4.25 (see Sept. 11). Stationery and postage, $9.50 (see Sept. 11).
T.
Charge
Note.
account.
S.
Adams
$15.00
$15.00
Sales
Notes Receivable
$15.00
Adams
S.
Note due
$15.00
in 30 da.
of Sept.
9,
Sept. 25.
Sept. 27.
Cash
sales,
( )
bill
side of the
$147.00
Sept. 17
Co
To Discount on Purchases
Cloverdale Wholesale
$3 00
.
$3 00
.
28.
T.
M.
Phillips
Cash
sales,
$43.77
52
Note.
left
side of the
Sept. 28.
Sept. 30.
Cash
sales,
S6. 42
Delivery boy
Clerk
$15.00
25.00
30. 00
Bookkeeper
D. Hathaway pays his account in full (see Sept. 23). Mr. Gray, wishing
to know the results of the month's transactions, takes inventory, finding
that it amounts to $513.00. You are instructed to draw up a statement
showing profit or loss for the month.
Note.
Page
Purchases
Sales
M. Phillips
Andrew Frey
S. Thomas
R. T. Myers
T.
4:
1
B. D.
10
J. J.
20
30
35
S.
McLaughUn
Tiery
D. Hathaway
B.
Adams
Ward
5:
Line 1
Line 10
Page
Cash
3:
Line
Line
Line
Li6e
Line
Page
A. B. Gray, Withdrawals
Line 1
Line 10
Line 20
Line 30
Page
A. B. Gray, Capital
2:
Line
Line
Page
however,
1:
Line 1
Line 6
Line 20
Page
First,
6:
Discount on Purchases
Line 1
Line 10
Line 20
Line 30
Supplies
7:
Line 1
Line 10
Line 20
Page
53
Notes Receivable
Delivery Equipment
8:
Line
Profit
and Loss
side of the
and
Cash Journal
vice versa.
This
is
column on the
is
When all postings are made see that all cross references have
been inserted in the folio columns. Next prepare a trial balance
of the Ledger.
This should agree with the following:
Trial
Balance A.
B.
Gray as
A. B. Gray, Capital
Purchases
$4,000.00
$1,650.00
699.62
Sales
Cash
T.
S.
3,689.47
M. Phillips
Thomas
8.00
14.00
23.40
6.00
5.00
R. T. Myers
Tiery
J. J.
B.
Ward
Cloverdale Wholesale Co
Discount on Purchases
Wages and
1,600.00
3 00
.
140 00
Salaries
Expense
Supplies
Dehvery Equipment
A. B. Ciray, Withdrawals
91.75
30.00
80. 00
15 00
400. 00
50.00
.
$ 6,202.62 $ 6,202.62
Assume that 3^
of the supplies
54
CHAPTER
VIII
of
Events A.
B.
Gray Oct.
1919.
M.
middle,
J. J.
Phillips; at middle, S.
Tiery
p. 15
at top,
p. 5
at
at
at top, R. T. Myers; at
at top, Cloverdale Whole-
Thomas; p. 14
B. Ward; p. 20
sale Co.
Note. In
" Sales " and "Sundries," respectively, and the two credit columns
sales
$47.20.
Note.
bill
5,
at middle).
$15.00
Pays
of Sept. 2, $500.00.
Charge
Purchases account for all purchases of mercredit Sales account for all sales of merchandise. To enter "Cash sales $47.20" in the Cash Journal
write "Sales" in the explanation column and enter the amount,
All cash sales should be similarly
$47.20, in the "Sales " column.
entered.
For advertising paid, charge "Advertising Expense"
and enter the amount $15.00, in the "General Expense" colunm.
Hereafter enter all expen.se items in the "General Expense"
column unless a special account is required, as in case of "Insurance" paid for on Oct. 6 (see below), in which case it should
be taken into "Sundries" column.
chandise
made and
55
56
2%
Oct. 4.
Note. In the Cash Journal charge Store and Lot for $1,950,
and in the General Journal charge Store and Lot $3,050, crediting
Expense, $50, and Mortgage, $3,000. Make proper explanation
following the entry, covering the expense adjustment, the mort-
gage,
thereof.
Note.
indicating
"from B. Arthur"
in the explanation
column
in the
putting the
from
amount
B. Arthur
in the
$1,000
Cash Book.
R. T. Myers, one of Mr. Gray's customers, has made an assignbankruptcy, and after his business has been liquidated he has paid
his unsecured creditors at the rate of 67 cents on the dollar.
Mr. Myers
owes Mr. Gray $23.40. Mr. Gray receives cash from Mr. Myers on above
Cash sales, $45.00.
basis (Bad Debts, p. 7, middle).
Oct.
ment
8.
in
57
side of the
Notes Payable
in the
General Journal.
It is
Oct.
10.
Cash
sales,
$40.50.
bill
of
Sept. 10.
Oct. 11.
Sells
$5.20; to S.
Oct., $3.00.
Oct. 13.
(Disct.
less
3,
discount
on
Sells
acct.,
mdse. to L. Floyd, $13.73 (p. 15); to S. Smith, $2.11 (p. 16); to B. Ward,
$3.33; to the Brighton Club, $14.00 (p. 16).
Cash sales, $63.50. Pays assistants as follows:
Oct. 14.
Delivery boy
Clerk
Bookkeeper.
$18 00
30 00
40, 00
.
Cash
Oct. 18.
B.
Oct. 20.
Cash
2/10,
n/30,
sales, $75.00.
Ward pays
$400.00.
acct. in full.
sales, $79.00.
bill
Co.,
of Sept. 20,
$600.00.
Oct. 21.
Buys grain
This
is
sufFcient to last
58
Note. Charge Store and Lot for the new fixtures. Why
not charge Furniture and Fixtures? Credit Store and Lot for
In the General Journal charge Expense and
sale of old fixtures.
credit Store and Lot for loss incurred on old fixtures.
Oct. 24.
Oct. 25.
$5.40; to D.
Sells
Hathaway,
$3.17.
Cash
sales, $88.73.
Oct. 27.
int.).
Cash
1 yr. for
Cash
Oct. 29.
T.
Oct. 30.
Cash
sales, $90.30.
M.
Phillips
pays
acct. in full.
bill
Oct.
(15
sales $95.00.
days.)
Oct. 31.
Cash
sales $100.00.
Pays
assistants:
$18.00
15.00
30.00
40. 00
Bookkeeper
Inventory Oct. 31
consumed.
$1500.
A. B.
Note.
$4,978.24.
liability.
CHAPTER IX
THE THEORY OF ACCRUALS AND OF DEFERRED
CHARGES
There are certain kinds of expenses which, although incurred
sometimes distant,
intervals.
There are also certain kinds of expenses which must
be paid for in advance of the time when they are actually incurred.
These two classes of expenses give rise to two special
problems in accounting which may be treated under the subjects, "accruals" and "deferred charges," respectively.
Interest.
Interest is an expense incurred for the use of borrowed money. It sometimes represents a very permanent and
fixed charge, as when it is paid for the use of funds borrowed on
mortgage security. Sometimes it is a temporary expense, as
when it is incurred on overdue accounts payable, notes discounted at the bank to secure temporary advances of money,
etc.
When money is borrowed on a mortgage the mortgage or
creditor thereby secures a lien on the real estate of the mortgagor
or borrower.
In case the mortgagor is unable to pay the
interest on the loan the mortgagee may foreclose the mortgage
and sell the mortgaged property for the satisfaction of both
interest and debt.
Interest Periods Dififer from Accounting Periods.
Interest is
reckoned as a percentage per annum on the amount loaned and
normally ranges from 3 to 7 per cent, depending on the safety
daily, are paid for in cash only at certain,
of the principal.
When
it
is
60
month
while interest
follows, that
if
the year.
interest expense.
To
we must have
"accrued" account. In the
known
as the
month
is
$25.00
Interest
To
When
$25 00
Interest Accrued
is
charged with
the month's due proportion of this expense; and "interest accrued," which
is
incurred on interest but as yet not payable because not due until
June
30.
profit
and
Since "interest"
loss
is
a nominal account,
it is
closed into
"In-
sheet as a liability.
At the end
of
is
made
in the Journal
61
to profit
not be credited to "interest accrued." If it is credited to "interest accrued" through a journal entry, then when the interest
is paid the following entry is required in the Cash Journal (here
written in general journal form)
$150 00
Interest Accrued
To Cash
$150.00
$ 25.00
125 00
Interest
Interest Accrued
To Cash
$150 00
Whichever method
If the
is followed, the result is the same.
pursued "interest" for the last month is charged
in the General Journal.
If the second plan is followed "interest" is charged in the Cash Journal for the sixth month. In
either case "interest accrued" is closed out by being charged
from the Cash Journal with the full amount of the items which
have accumulated to its credit during the preceding months. If
the last month's interest is charged in the Journal and credited
to "interest accrued," then when the "interest accrued" account
is finally closed by being charged with the cash paid out, it
appears thus:
first
plan
is
Interest Accrued
June 30
To Cash
$150.00
Jan. 31
Feb. 28
Mar. 31
Apr. 30
May
31
June 30
By Interest
By Interest
By Interest
By Interest
By Interest
By Interest
$25.00
25.00
25.00
25.00
25.00
25.00
$150.00
$150.00
If,
is
charged in
when
finally
closed,
62
is
incurred, the
interest accrued
Wages and
Salaries.
Wages and salaries sometimes require
same treatment as interest. Salaries are customarily paid
monthly, and consequently they may be charged to a "salaries
expense" account when they are paid in cash. By so doing the
month's proper burden of this expense is charged to profit and
loss.
It is only when the time of payment of salaries is not
monthly that the theory of accruals applies. Wages are usually
paid weekly or semi-monthly, and since the month-ends do not,
the
an overlapping
wages expense in a weekly or semi-monthly period which
extend from one month into the next one. The wages expense
for such a period must be accurately pro-rated over the months
to which they apply.
Wages Accrued Illustrated. One illustration will suffice. A
merchant pays his assistants semi-monthly. A certain payday
falls on the seventh of June.
The profit and loss account for
May must be charged with the wages accruing during the last
week of May even though they are not due until June 7. If
one week's wages amount to $40 the adjustment can be made in
the General Journal, thus:
as a rule, correspond with week-ends, there occurs
of
May
31
Wages Expense
^
To Wages Accrued
$40.00
$40 00
.
Miscellaneous Accruals.
$40.00
40 00
.
$80.00
The
same
principle applies to
all
some
63
is
reason.
of this character.
Theo-
some very small expenses ought to be similarly distributed. But the error may be so slight in charging them entirely
to profit and loss in the month in which they occur that the work
retically
required to
make a distribution is not worth while. Associaamount and similar items may be thus cared
To
to profit
Then
at the
Land
Plant and Machinery
Cash
$ 50,000
25,000
$100,000
25,000
$100,000
$100,000
64
Land
$ 50,000
25,000
Cash
10,600
Deferred Charges
14,400
$100,000
$100 ,000
During the
first
$100.000
by monthy
entries
as follows
Profit
and Loss
To
$200.00
Deferred Charges
$200.00
In this way the monthly profit and loss account is charged with
proper proportion of the cost of ore-stripping, and at the end
its
be charged
amount of the
off.
it is
made
in the profit
and
loss
It
is
best to consider
depreciation as a
what
different.
is
some-
CHAPTER X
ACCRUALS AND DEFERRED CHARGES PRACTICE
Problem
store
and
1.
June
12,
1920
Cash
Mortgage
$4,000,00
$4,000. 00
$210.42
116.90
$327.32
of accrued wages, 2 weeks.
quarter.
in
sums:
January
February
$300.00
216.00
300.00
348.00
192.00
324.00
March
April
May
June
5
6o
66
may
be equitably charged to
Thus of the $300
profit and loss over a period of 12 months.
spent in January, ^{2, or $25, is a proper charge to expense in
January,
The
3^12 in
trial
Oliver
Matthews, as
at
June
is
30, 1920
Matthews Capital
May
31
Merchandise
Accounts Receivable
Notes Receivable
$25,000. 00
840.00
900. 00
10,181 00
.
2,000.00
3,400 00
.
500.00
300.00
444.22
Supplies
Wages
Salaries
$16,000. 00
as follows:
400. 00
620.00
800.00
4,000.00
2,320. 12
200. 00
65 10
.
$33,985.22
$33,985.22
trial
Interest
Interest Accrued
To
liability therefor.
Wages
Wages Accrued
To bring into the books the expense of wages accrued
to date and to show the liability therefor.
Salaries
Salaries
To
Accrued
bring into
67
{%
When
"Wages"
necessary to draw up a
this trial balance should
must be supplied
of adjustments.
From
trial
which
is
as follows:
Trial Balance, A. G. Williams, as at Dec. 31, 1919
A. G.
Williams Capital
Real Estate
$ 50,000.00
$ 25,000.00
Delivery Equipment
Inventory, June 30, 1919
Furniture and Fixtures
Purchases
2,500. 00
30,000.00
3,000.00
57,300.00
Sales
63,350.00
Accounts Receivable
Wages
Supplies on Hand, June 30, 1919
Supplies Purchased
Interest
4,520.00
1,900.00
620.00
300.00
350 00
1,500 00
420. 00
.
Salaries
Miscellaneous Expense
Cash
Notes Payable
2,000.00
10,000.00
Accounts Payable
Rent
of Delivery
Equipment
$129,410.00
Wages were
is
$129,410.00
Payable
5,960.00
100.00
68
at the rate of 6
per annum.
are paid to the proprietor quarterly. Mar. 31, June 30, Sept. 30,
CHAPTER XI
DEPRECIATION, BAD DEBTS, AND VALUATION
RESERVES
Nearly every business enterprise incurs unavoidable expenses
due to the deterioration of material assets and the uncollectible
character of some of its accounts receivable. These two classes
of losses, although in no way related to each other, can best be
considered together because of the similarity in the accounting
Meaning
of
Depreciation.
In
a wide sense,
depreciation
losses include
it
bad debts.
may be
fold terminology of
1.
Wear and
2.
Inadequacy
3.
Obsolescence
tear
Nature of Depreciation.
occurs
when a material
Depreciation
due to weathering or usage, or both. Depreciation from inadequacy occurs when a material structure undergoes deterioration
in value, due to its failure to perform the functions which increasing
demands and changing conditions impose upon it. Depreciation
from obsolescence occurs when a material structure undergoes
deterioration in value, due to the invention of devices better
adapted to perform the same work.
Nature of Invested Capital. Failure to make adequate
ACCOUNTS IN THEORY AND PRACTICE
70
made by
these
demands are
i.e.,
Some
of
capital invested in
way
i.e.,
and so
capital in the
on.
form
liabilities
liabilities
while
and provide
when
desirable,
and
of
of the
working capital
com-
fall
Such a stringency
usually remedied before
due.
is
is here employed in the economic sense as reemployed to produce wealth. In this book the word is
more frequently employed in the accounting sense as indicating net worth
1
ferring to wealth
or proprietorship.
71
Land
$ 20,000
100,000
30,000
Buildings
Fixtures
Inventory
CapitalLawrence
Oliver.
40,000
10,000
Cash
$200,000
$200,000
The
$200,000
They
will
depreciate
thus:
Profit
Inventory (old)
Purchases
Expenses
300,000
10,000
24,000
Inventory (new)
$ 44,000
330,000
Sales
$3 74,000
$3 74,000
of buildings
and
and
loss account,
and
Land
$ 20,000
Buildings
100,000
Fixtures
30,000
Inventory
Accounts Receivable
43,000
20,000
Cash
15,000
$228,000
Oliver
now
CapitalLawrence
Oliver.
Accounts Payable
Acceptances Payable
$200,000
18,000
10,000
$228,000
worn
72
out and that his buildings are becoming obsolete and inadequate
to meet modern requirements.
A fair valuation shows the
fixtures to be worth $5,000, and the buildings $25,000.
During
the twenty years the fixtures have depreciated $25,000, or $1,250
As a
half,
values, indicates:
Balance Sheet, Lawrence Oliver
Land
$ 20,000
25,000
Buildings
Fixtures
5,000
Inventory
Accounts Receivable
CapitalLawrence
SI 00,000
18,000
10,000
43,000
20,000
15.000
Cash
$128,000
$128,000
many
Oliver.
Accounts Payable
Acceptances Payable
analogies in real
life.
Oliver,
affairs,
Oliver
Unless he can
fall
must borrow.
Assume that Oliver borrows the required amount, $100,000,
at 6 per cent interest, by giving a mortgage on all real estate
including the newly constructed buildings. The old buildings
and fixtures are disposed of for $30,000, cash. This with the
$100,000 borrowed furnishes the amount required to pay for the
fortune, he
73
Land
$ 20,000
100.000
Buildings
30,000
43,000
Fixtures
Inventory
Accounts Receivable
CapitalLawrence
Mortgage
Oliver.
Accounts Payable
Acceptances Payable
$100,000
100,000
18,000
10,000
20,000
Cash
15,000
$228,000
$228,000
As a consequence
reduced
amount. He
has, for all purposes, shared it half and half with the mortgagee
who loaned him $100,000. Interest on the mortgage amounts
to $6,000 per annum, which is an addition to the fixed charges
of erroneous accounting, Oliver has
If
twenty years in the same manner as during the past twenty years,
his net worth will be reduced to nothing and the creditors will
become the owners of the enterprise.
Depreciation a Cause of Bankruptcy. Although, in actual
business, conditions do not recur with unchanging regularity,
the situation described above has many prototypes. Their
similarity to our illustration is sometimes obscured by the
is
when they
willful,
Many
expenses,
74
and Loss
To Reserve
$5,000.00
for Depreciation of Fixtures
$1,250.00
3,750.00
The
reserves.
termed valuation
function.
Accounts are opened in the Ledger entitled "Reserve for Depreciation of Fixtures" and "Reserve for Depreciation of Building."
When the above entry is posted these reserve accounts will be
credited with the amounts indicated.
These reserves are real
accounts and remain open in the Ledger. Although they have
credit balances they represent neither liabilities nor capital,
as do most real accounts having credit balances. They are in a
distinct class, because their usefulness arises out of the complementary relationship which exists between them and the asset
accounts, "Fixtures" and "Buildings." They evaluate, i.e.,
justifies
Otherwise accounting requirements would be satisfied by substituting for the above entry the following:
Profit
and Loss
To
$5,000.00
$3,750.00
1,250.00
Buildings
Fixtures
So
and
loss
account
is
But
it
and
it
correct.
75
Technically, either
which
it
is
method
credited
prehension
of
the advantages
of
balance sheet at the end of the twentieth year would have been
essentially as follows
Land
Buildings
$ 20,000
100,000
Fixtures
30,000
Inventory
Accounts Receivable
43,000
20,000
Cash
115,000
CapitalLawrence
Oliver.
$200,000
75,000
Accounts Payable
Acceptances Payable
$328,000
25,000
18,000
10,000
$328,000
shown
Land
$ 20,000
Buildings
$100,000
Depreciation..
Fixtures
75,000
25,000
Accounts Payable
18,000
Acceptances Payable
10,000
$30,000
Depreciation
25,000
Inventory
Accounts Receivable
Cash
5,000
43,000
20,000
115,000
$228,000
$228,000
76
He
still
possesses
his
original
capital
and any
of
'
p. 30.
It follows
that
if
the
amount
77
of the deprecia-
tion, it will
Balance Sheet
Buildings
$20,000
10,000
Other Assets
Capital
$30,000
$30,000
$30,000
and
his buildings,
then show.
Balance Sheet
Capital
$20,000
Buildings
$30,000
Depreciation.
20,000
Other Assets
$30,000
$30,000
$30,000
in the valua-
$20,000.00
To Buildings
after which the balance sheet becomes:
$20,000.00
Balance Sheet
Other Assets
$30,000
Capital
$30,000
$30,000
and
is
$30,000
made:
Balance Sheet
Buildings
Other Assets
$20,000
10,000
$30,000
Capital
$30,000
$30,000
78
up a
In practice
it is
customary to
number
of assets
ones.
is
79
loss,
at the
same
and Loss
bad debts
uncollectible
ending
credit reserve
accounts
on
period
the
for
receivable
for
for
is
set up:
Balance Sheet
Accounts Receivable
Less:
Reserve for
Debts
$100,000
Capital
$399,500
Bad
500
$ 99,500
Other Assets
$300,000
$399,500
$399,500
all
23. 10
$456. 70
Total
The
$200. 00
233.60
Arthur Morris
Harper and Jones
count, respectively,
Reserve for
To
is
found worthless:
Bad Debts
the Imperial
To Harper and
$200.00
Company
Jones
$200.00
233.60
233.60
23. 10
23 10
,
80
CHAPTER
XII
1.
Following
James Andrews as
at
is
December
31, 1919:
$ 40,000.00
$
200. 00
5,560. 00
15,000.00
600 00
.
Purchases
60,000. 00
60,000.00
Sales
10,000.00
15,000. 00
Accounts Payable
Cash
6,000.00
3,000.00
250.00
500 00
60. 00
Fixtures
Wages
6,000.00
200.00
700.00
250.00
300.00
Interest
General Expense
Advertising
Insurance
$106,810.00
$106,8 10.00
annum and
81
82
may be made before taking a trial balance. Similarly the adjustments for advertising and insurance might be made before
taking a trial balance. This, of course, is impossible here because
the trial balance given above was taken before making the
adjustments.
The capital account of James Andrews as at Jan. 1, 1920,
should be $46,840.00.
In setting up the balance sheet show the depreciation reserves
as deductions from the asset accounts to which they are supplementary, thus:
(a)
(fe)
in interior
column
(a)
and the
(6).
all
Even
is
the government for income tax purposes, and in any case to show
in proper
consists of a profit
83
$25,000.00
56 40
Baldwin, Capital.
Interest Accrued
Accounts Receivable
Accounts Payable
Reserve for Bad Debts
$ 4,056.00
5,000. 00
55 00
.
Land
Delivery Equipment
Rent
of
15,500.00
1,500. 00
10,000. 00
Purchases
12,500.00
Sales
15,600.40
700.00
500 00
Cash
Furniture and Fixtures
Reserve for Depreciation of Store Building
Reserve for Depreciation of Furniture and Fixtures
690.00
115 00
.
Expenses
1,200.00
Mortgage
5,640.00
$49,056.40
Additional
$16,000.00.
data:
Write
The inventory
off for
bad debts
as
for
of
$49,056.40
is
December an amount
value of $2,000.00.
Write
off
life
of
48 years.
month on
Write
on
cost.
March
off
12%
6% payable
31.
liminary to closing.
84
The
ditions remains fairly uniform from month to month.
advantages of charging Bad Debts and crediting a reserve are
two: (a) the current period is charged with its due burden, whereas it would be deferred if we waited until we can learn what
accounts are bad; (b) the bu) den is evenly distributed from month
When individual accounts are ascertained to be bad,
to month.
they are charged against the bad debts reserve. Should experience prove that the credits to this reserve are greater than the
charges against it of the uncollectible accounts, it would be
an indication that too much is being charged periodically to
BIBLIOGRAPHY
Part
Boole, A. M.
I.
Fundamental Principles
Comprehensive Bookkeeping.
New
York, 1905.
many
A clearly
exercises.
Cole, W. M. Accounts: Their Construction and Interpretation. Revised and Enlarged Edition.
Boston, 1915. Chapters one to five,
inclusive, give much material of an elementary character.
Dickinson, A. L. Accounting Practice and Procedure. New York, 1913.
Chapter I contains a brief treatise on bookkeeping, but not adapted
for the beginner.
EsQUERRE,
Applied Theory of Accounts. New York, 1914. Conon both single and double entry.
Principles of Accounting.
Chicago, 1916. Employs the
P. J.
tains chapters
Oilman,
S.
New
York, 1904.
85
general
on depreciation.
Sprague, C.
retical treatise
Vanderlip, F. a.
on accounting.
Business and Education.
general interest.
New
York, 1907.
theo-
A book of
"
PART
II
PARTNERSHIP ACCOUNTING
CHAPTER
XIII
If it is
number
is
of investors to
of
Thus
1918 the personal service corporation is taxed upon the same plan as the partnership, that is, the
tax is levied upon the individual members and not upon the
corporation as such. We have, therefore:
of
2.
3.
1.
87
88
Common Law
Partnerships.
When
reference
is
it
made
to
may
be
These are
scribed procedure.
known
who
in liability
known
as general partners.
certificate
be deposited
1.
4.
5.
Amount
6.
Duration of partnership.
2.
3.
of the capital.
New York
laws,
is
common law
partners,
by making death
or attempted
name
Illinois
and
impossible.
Limited partnerships
in
Michigan and
89
The
is
made
taxation.
General Definitions.
The
The New York law says that "a partnership as between the
members thereof is the association, not incorporated, of two or
more persons who have agreed to combine their labor, property
and skill, or some of them, for the purpose of engaging in any
lawful trade or business and sharing the profits and losses as
between them."
Agreement. -It is customary for prospective partners to form a covenant wherein they agree upon the manner in
which their enterprise shall be managed. Unforeseen discrepancies frequently arise due to the failure to put into the articles
of agreement adequate provision against future contingencies.
In addition to the name, address, purpose and duration of the
partnership there should appear in the articles of agreement
well
Articles of
specific
information as to:
Capital
lated profits.
'
90
2.
vested by partners.
3.
among
5.
New
Partners.
It
is
often
will
in
any case
may make
Dicksee suggests
agreement so
that a substitute auditor could be secured only with the unanimous consent of the partners such consent being always
necessary to change the articles of agreement. This would
prevent changes being made by a majority of partners to the
prejudice of a minority a not unlikely occurrence in view of the
delicate questions that may arise in partnership adjustments.
It may also be desirable to enter in the agreement provision to
the effect that the accounts be kept by double entry and that
questions involving accounting principles be submitted to the
stances
that the
name
This
is
common
91
law dictum. Such events are apt to occur at times when to make
an accounting by closing the books would cause inconvenience.
If profits do not fluctuate greatly provision should be made to
the effect that the outgoing partner or his estate be compensated
on the basis of the preceding year's profits. It will perhaps be
preferable to make such payment on the instalment plan to
avoid the disbursement of too great an amount at one time.
Causes of Dissolution. A partnership may be dissolved (o)
by death
of a partner,
and
(/)
and so
on.
At the dissolution
of a
Creditors.
2.
3.
Capital of partners.
4.
Residue distributed
ratio.
among
CHAPTER XIV
THEORY OF PARTNERSHIP ACCOUNTING
Peculiarities of Partnership Accounting.
In general, partner-
we have already
from the procedure followed in
connection with the treatment of
The
discussed.
chief variations
the partners.
We
1.
Opening
2.
Interest
3.
Closing entries.
entries.
on investments.
4.
Dissolution.
5.
Admission of partners.
Opening Entries.
Opening
liabilities:
Gordon
Assets:
Cash
Merchandise
Store and Lot
$ 1,000. 00
4,000.00
7,000.00
Accounts Receivable
Furniture and Fixtures
Notes Receivable
2,000.00
500 00
.
3,000.
00
$17,500.00
Liabilities:
Accounts Payable
Mortgage
$ 1,.500.00
3,000.00
$ 4,500.00
R. Tarrant
Assets:
Cash
$10,000.00
Liabilities:
None
92
93
may
Gordon and R. Tarrant this day enter into a partnership under the
of Gordon and Tarrant, with assets, liabilities and capital as
L.
name
firm
follows
Cash
$ 1,000.00
4,000.00
Merchandise
Store and Lot
Accounts Receivable
Furniture and Fixtures
Notes Receivable
To Accounts Payable
7,000.00
2,000 00
.
500.00
3,000.00
>
$ 1,500. 00
Mortgage
3,000. 00
13,000.00
L. Gordon, Capital
Investments of L. Gordon
&
in firm of
Grordon
Tarrant.
Cash
$10,000. 00
To R.
Tarrant, Capital
Investment of R. Tarrant
&
$10,000.00
in firm of
Gordon
Tarrant.
and Tarrant
by charging Gordon's
and crediting Tarrant's capital account with one-half the
difference between them, viz., $1,500, or (6) by bringing in good-
will at
is:
In case of (o)
94
L. Gordon, Capital
$1,500
To R. Tarrant, Capital
To equalize the partners' capital
while in case of
(6)
$1,500
accounts.
$10,000
Goodwill
To
3,000
Tarrant, Capital
Investment of R. Tarrant
$13,000
in firm of
Gordon
&
Tarrant.
may
A
B
$ 3,000
6,000
4,500
Total interest
The $13,500
will
$13,500
its cost,
or $4,500.
We
see
95
that B, whose investment was just equal to the average investment of the partners, or $75,000, neither gains nor loses by the
procedure, and that A secures $1,500 less and C $1,500 more
than would be the case were the partners not credited with
interest on their capital accounts.
This net result might have
been accomplished by the following adjustment:
$1,500
$1,500
This avoids carrying the interest to the Profit and Loss account
and since the effect is merely an adjustment of profits as between
partners it appears to be more logical than to credit each partner's
account with 6% of its amount, and charge it with }^ of the
total interest, thus bringing it into the Profit and Loss account.
When profits are distributed to partners in proportion to investments, the only object is to distinguish between interest on the
amounts invested and profits beyond that, since each partner
will be credited with the same amount as if interest were not
considered at all. In this case it is necessary to carry interest
to Profit
If
and Loss.
drawn
or invested.
invest $5,000
Withdrawals:
March
$100.00
200.00
31st
Sept. 30th
July 31st
$ 50.00
75 00
Oct. 31st
90.00
April 30th
Additional Investments:
June 30th
B March
$1,000.00
2,000.00
31st
A has invested:
$5,000 for 12 mo. or $60,000 for
6,000 for
1,000 for 6 mo. or
mo.
mo.
$66,000 for
mo.
or
He
has withdrawn:
96
$900 for
600 for
mo.
mo.
$1,500 for
mo.
He
$138,000 for
mo.
mo.
mo.
has withdrawn:
$955 for
mo.
mo.
mo.
mo.
1
1
made
but
is
and Loss
A, Withdrawals
B, Withdrawals
C, Withdrawals
97
$15,000
To
To
$5,000
5,000
5,000
A, Withdrawals
To
$ 4,900
A, Capital
$4,900
B, Withdrawals
To
$ 4,800
B, Capital
$4,800
C, Withdrawals
To
To
$ 4,700
C, Capital
$4,700
The
A, Withdrawals
To Cash
To A, Capital
100.00
$
....
By
Profit
and Loss.
$5,000 00
4,900.00
$5,000.00
$5,000.00
B, WitlLdrawals
To Cash
To B, Capital
200.00
$
....
By
Profit
and Loss.
$5,000 00
4,800.00
$5,000.00
$5,000.00
C, Witlldrawals
To Cash
To C, Capital
$
....
300 00
4,700.00
By
Profit
and Loss
$5,000.00
Dissolution.
same
..
$5,000.00
$5,000 00
In theory capital
which it was invested. Any increase in the value of the investment over the contributions by the partners represents
accumulated profits and is governed by the rule for distribution
Likewise a deficit represents accumulated
of profits and losses.
Consequently the
losses and is governed by the same rule.
first step in the distribution of funds is to divide the accumulated
in
98
among
and
which remaining
gains, after
accounts.
will
of profit distribution.
Assume that
A and B as
$50,000
20,000
Assets
Deficit
A and B
is
as follows:
at
A
B
Capital,
Capital,
$50,000
20,000
$70,000
If profits
to
and
$70,000
Balance Sheet
Assets
A and B as
$50,000
Capital,
Capital,
at
A
B
$40,000
10,000
$50,000
and the
3^^
distribution
in the ratio of 4 to
of
1,
$50,000
not of 5 to
2,
made
to
and
investments.
It is quite possible that the distribution of the deficit to the
in
the
amount
of the deficit.
sheet, showing a
deficit of $60,000:
$ 40,000
60,000
A, Capital
B, Capital
C, Capital
D, Capital
$100,000
$ 50,000
'.
10,000
20,000
20,000
$100,000
altered to
partners
it
show the
99
becomes:
Balance Sheet of A, B, C, and D, as
Assets
$40,000
5,000
B, Capital
at
$35,000
5,000
5,000
A, Capital
C, Capital
D, Capital
$45,000
$45,000
If B makes good the claim against him for $5,000 the other
partners will receive the assets in distribution as shown by their
capital accounts.
If he fails, however, this loss must in turn
be distributed among A, C and D equally, each bearing $1,666.67
of the loss, after which the distribution will be made on the
basis of the capital account balances then remaining.
Admission
of Partners.
is
admitted his
in profits
there
is
Cash
Other assets
$ 1,000
10,000
A and
Thus
if
the
B, as at
A, Capital
B, Capital
$ 5,500
5,500
$11,000
$11,000
interest
either,
(a)
some agree-
introducing goodwill.
If the plan suggested in (a) above is followed the following
Journal entry is necessary to bring goodwill into the books:
100
Goodwill
To
To
$3,000
A, Capital
$1,500
B, Capital
1,500
The
capital accounts of
and when
(b)
C, Capital
To
$1 ,000
A, Capital
B, Capital
S500
500
As per agreement,
etc.
problem
different
arises
interest in a
interest to the
Balance Sheet of
?100,000
Assets.
A and
B, as at
A, Capital
$ 60,000
B, Capital
40,000
$100,000
$100,000
and
sells
necessary to
make
is
the adjustment,
$30,000
A, Capital
To C, Capital
$30,000
of
$100,000
$100,000
A and
B, as at
A, Capital
$ 30,000
B, Capital
40,000
C, Capital
30,000
$100,000
Note that the investment has not been increased and that the
only change has been to transfer one-half of A's capital account
The only transfer of funds has been from
to C's capital account.
to A, personally.
CHAPTER XV
PARTNERSHIP ACCOUNTING-PRACTICE
Diary of Events
for
Nov.
(J.
A. Smith,
may
and
of the
see
101
102
Note.
Make entries
the
in
of delivery equipment.
in the
General Journal.
The information
$975.00.
M.
T.
Phillips, $7.30.
Nov.
Note
7.
is
paid and
bill of
Note.
lading secured.
Nov.
13.
Prevention
Donate $5.00
of
to Salvation
Tuberculosis.
Army and
Phillips $7.00.
Nov.
14.
bill
for
of
Nov.
4,
less
discount.
Nov.
15.
Cash
in
part
payment
improvements on
store, as per
agreement.
for
Note.
Nov,
17,
Sell op|
Return defective
103
goods to Cloverdale Wholesale Co., receiving credit for $23.00; and to Townsend Supply Co., credit $13.40.
Nov.
18.
Note.
and Bastian.
$40 00
.
$39.20
.80
23.
24.
25.
to L. Floyd, $40.00.
of
Nov.
Nov.
Nov.
26.
L.
for
$40
for
mo., Int. at
6%,
for
purchase
25.
year).
Nov.
30.
Pay
assistants as
(a)
Telegrams, $4.00.
Take a trial balance.
(6)
Make
$702.03.
interest
on preceding pay-day.
Draw check
Cash
for
charging
104
up
and
(c)
Set
(d)
Balance sheet.
profit
loss account.
Inventory, Nov. 30
Carry
$1,200
profits to the
The
balances as follows:
A. B. Gray
J.
$5,251.31
4,336.99
A. Smith
BIBLIOGRAPHY
\
Part
Child, P.
Cole, W.
II.
Partnership Accounting
M.
EsQUERRife, P.
J.
New
York, 1914.
Re-
Chapter
XXI.
Oilman, S. Principles of Accounting. Chicago, 1916. Chapter IX.
Greendlinger, L. Accountancy Problems. New York, 1910. Vol.
I,
Both volumes I and II contain much miscellaneous
pp. 1-40.
matter on partnership. Vol. I, page 40, gives a brief bibliography on
partnership.
PART
III
CHAPTER XVI
SUBORDINATE LEDGERS AND CONTROLLING
ACCOUNTS
Journal
credit.
Columnar Journals.
As far as cash
is
growing number
of
Briefly,
106
the General Ledger ("general " being the word used to distinguish
the main Ledger from the "subordinate" Ledgers) to which are
posted, from the Journals, the totals of the debits and credits
which are posted in detail to the subordinate Ledgers which these
controlHng accounts "control." The subordinate Ledger is
frequently
Thus
if all
that Ledger
its
may
Similarly
if
its
may
be called
Provide Elasticity.
The
principle of
and
elas-
cir-
cumstances require.
Specialized Journals Illustrated. To clarify this matter, let
us assume that a merchant, Marion Smith, has in operation a
system of accounts consisting of the General and Cash Journals
and a Ledger. With the growth of his business he experiences
107
is
crowded with an excessive number of entries owing to his numerous purchases and sales. For various reasons it would be better
if purchases and sales could be segregated in special Purchases
and Sales Journals. This would not only remove a large volume
of detail from the General Journal, but it would also make easy a
When
The
another.
by making
it
and so on.
and Purchases Journals:
for Sales
Name
Date
Jan.
of
Customer
Amount
L.F.
3 A. L. Grant
3 L. 0. McDonald
12 0. 0. Stout
50 00
25 00
72 00
147 00
Name
Date
Jan.
of Creditor
L.F.
Atlas Ck>mpany
Fuller Supply
Oregon
&
Co
Sons
Co
Newton Company
Atlas
Accounts Payable, Cr
Amount
200 00
100 00
150 00
125 00
98 00
673 00
Purchases, Dr.
a double entry.
it is
The customer
is
108
Specialized Ledgers.
and
creditors,
it is
If,
Special
system
Columns
it is
in Journals Illustrated.
To
complete the
Thus, since
cash receipts are entered on the left hand page of the Cash Journal,
109
(left side)
Accounts Rec.
Explanation
18 A. L. Grant
Jan.
L. O.
50
25
McDonald
Accounts Receivable, Cr.
Cash, Dr.
Atlas
75
(right side)
Accounts Pay
Explanation
Jan.
General
Company
General
200
150
98
& Sons
Newton & Company.
Oregon
448 00
I
I
Explanation
Dr.
Accts. Pay
Dr.
General
Cr.
Accts. Rec.
Cr.
General
Jan. 10
Co
To Notes Payable
Fuller Supply
Note due
in
mo.,
100 00
100 00
int.
at
6%.
Jan. 20
Notes Receivable
To O. O. Stout
Due
in
mo., int. at
72 00
72 00
6%.
Jan. 21
AtUu Company
125 00
To Notes Payable
Due
in
mo.,
int. at
125 00
6%.
225 00
72 ,
110
is
shown below
Pay
General
Dr.
Dr.
Diary
of
r.
^
Explanation
Events.
The
General
Cr.
Accts. Rec.
Cr.
following:
1.
Jan.
2.
$25.00.
Jan. 19.
Jan. 20.
interest at
Jan. 21.
Jan. 22.
6%.
Pays Atlas Co. bill of Jan. 16, with note due in
Pays Newton & Co. bill of Jan. 17, Cash, $98.
Postings Explained.
mo., at
6%.
of the details
in these special
is
111
From
Ledger.
accounts
Accounts Receivable
Jan. 31
To
sales
147.00
Jan. 31
31
By Cash
By Notes
able
Jan. 31
31
As
Accounts Payable
To Cash
448 00
Jan. 31
To Notes Payable 225.00
.
75.00
Receiv-
72.00
happens,
settled, so that
112
ordinate ledger
the error
a limited
is
is
its
controlling account,
it
field.
The
month
is
posted to the credit of the accounts receivable controlHng accounts and to the debit of the notes receivable account in the
General Ledger. Since notes payable are given in payment of
113
Note.
At
exercises given in
study of Chapter
XVI I.
this point
CHAPTER XVII
ACCOUNTING FOR PETTY CASH PAYMENTS
The Bank Account.
problem which
arises
in the daily
sums
It is customary for nearly every proprietor, firm, and
company to keep an account at one or more banks. Banks
furnish many conveniences. It is through them that the plan
of making payment by means of checks becomes possible.
Banks
routine of business consists in efficiently paying out small
of cash.
make
them indispensable aids in modern business. An account is
opened at a bank by making an initial deposit of money for
possess facilities for collection, credit granting, etc., which
adopted.
show that
if all
cash receipts
are entered in the Cash Journal and also deposited in the bank,
and that if
drawn out
all
spond
114
115
ments made
directly
difficult
to explain
This
leads to confusion
and makes
Cash Journal on the one hand and the check book and pass
This trouble may be avoided by drawing
book on the other.
a check, to "cash," upon the bank for a sum sufficient to make
a week, or possibly
all petty cash payments for a given period
two weeks. In the Cash Journal this check should be charged
^
To Cash
all
1.
To Cash
$100.00
From
above
The pass book is being displaced by the monthly statement, which
checks drawn and deposits made.
"
lists
116
1
S
<
<
1
.9
a
c
5
a
1
o
eo
-*
.S
1
a
<
S
3
u
u
3
(N
So
ci n
tH I
lo
It
03
d
o
c
"5
o
o
n
Xi
M
a(
CO
Tf
i>-
(2
2
(N "H
S
M
^(2
(N
(N
at
a
-5
iM fC > 0 t^
1.
Stationery
and
printing,
$2.20;
telegrams,
117
$3.00; purchases,
$10.00.
2.
3.
Purchases, $10.20.
5.
6.
7.
purchases, $15.00.
At the end
of the
week the
total of each
cash fund.
may
$ 2 20
3 60
.
General Expense
Telegrams
Withdrawals
Purchases
Advertising
7 .00
10.00
52.20
4 00
10. 00
.
Interest
$89.00
Total
better;
if
amount
payment may be
if
large, the
better.
check
is
Every petty
cash disbursement should be receipted for to prevent the possibility of improper withdrawals from the petty cash fund.
Advantages of Imprest System. The petty cash fund s ould
be kept separate from the daily cash receipts. Its introduction
makes it easy to deposit as one sum the total of the day's receipts.
The amount of such deposit is also entered in the check book and
in the bank pass book, thus making uniform the record of receipts in Cash Journal, check book, and pass book.
Moreover,
all disbursements are made either directly or indirectly by check,
118
amount
is
replenished only
by drawing a check
Hence the
disbursements side of the Cash Journal should also be in agreement with the check book and bank statement, when outstanding
checks are considered. Correct accounting for cash
simplified through the use of the imprest system.
is
greatly
CHAPTER
XVIII
new system
of
following books
1.
Cash Journal.
5.
2.
General Journal.
6.
3.
Sales Journal.
7.
3a.
Purchases Journal.
Accounts Receivable Ledger.
8.
4.
9.
make an analysis
and submit the following balance sheet of Allen
and Goodloe:
Balance Sheet, Allen and Goodloe, as at January
Assets
Buildings and
Liabilities
Land
Inventory 1/1/19
Accounts Receivable
(Schedule I)
Insurance Prepaid
Cash
Salaries Prepaid
1919
Capital A. J. Allen
Capital R. T. Goodloe.
$22,500
10,310
$15,500
14,300
4,312
1,
and Capital
200
900
500
Mortgage on Buildings
3,317
9,055
3,200
250
$42,172
$42,172
119
120
Schedule
List of Accounts Receivable, Allen
J.
and
January 1, 1919:
$ 217.40
Goodloe, as at
M. Ogden
Brewer
L. B.
100.00
K. Cortland
O. D, Dunn
R. R. Rutherford
A. K. Cornwall
The Wildwood Club
N. N. Smith
B. A. Barton
L. D. Donovan
A. A. Alden
G.J. Winters
M. S. Gates
K. N. Brown
D. F. Swift
27. 12
S.
L. O.
328.05
10.40
813.50
1,400.00
310.00
43 10
77 11
350.50
43.70
15.70
11.75
.
73. 10
Dent
112.00
200.00
3.12
175.45
Sutherland
S. S.
J.J. Oliver
S.
K. Cousin
Total Accounts Receivable
Schedule
List of Accounts Payable, Allen
$4,312.00
II
and Goodloe, as
at
January \, 1919:
$ 213.00
275 40
635 00
.
March
127.00
23.00
378 60
380.00
320.00
140.00
600.00
225.00
.
$3,317.00
These
Note.
originally
CONTROLDING ACCOUNTS
121
four
the
To
first three,
therein as follows:
Capital
Capital
A. Allen
R. T. Goodloe
J.
Buildings
Inventory
Insurance Prepaid
Furniture and Fixtures
Notes Receivable
Cash
Salaries Prepaid
Accounts Payable
Accounts Receivable
Mortgage on Buildings
page
page
page
page
page
page
page
page
page
page
page
page
1,
1,
2,
2,
3,
3,
4,
4,
5,
6,
6,
7,
top
middle
top
middle
top
middle
top
middle
top
top
middle
top
122
a
3
:S
o
E
s
c
-0
jC
09
s-S
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03
a>
1a
03
9
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5,,
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11
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v
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b
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a
o
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a
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a
e
a
e9
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a
m
a
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_B
*8
g^
Q
1
a
s.
J3
e
o
01
ea
J3
n?
<3
T3
>.
a
3
CO
03
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Is
^<
^
|s
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s>
o^S
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Qo
'
ow
>>
"Xl
c
fe
3 >
o
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03
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H
5
Q
s
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u a
p ^
CONTROLLING ACCOUNTS
123
As occasion
additional
arises
where convenient
in the
of
1.
Note.
in the
Cash Journal,
but one
B. A. Barton
Also
make
$15.20
This
amount, here
all
is
J.
Winters.
100., cashing
is
it,
for
disbursements not
Cash Journal,
Next enter the payment from petty cash in the Petty Cash
Book under the date of "Jan 1," placing the total ($1.95) in the
"Amount" column and making the distributions, "General
Expense," $0.75, and "Stationery & Printing," $1.20.
in
&
Co.
in full of
amount paid
in
the
"Net" column.
Jan.
$62.30.
3.
Sell
on account
124
4.
Jan.
6.
Note.
Enter
"Net" column
of the
Cash
Totals
Wholesa
Jan.
-.
$147.30
Purchase from Allen and Allen show case, $50.00 net, and mdse.,
8.
Note.
It is
necessary to
make two
9.
Co. $275.40.
expense, $6.37.
turing
in full of account; also Clyde ManufacPetty Cash payments: purchases $11.40; general
bill of
$225.00, net.
on account
Note.
Jan.
8.
J.
Enter purchases
made on
CONTROLLING ACCOUNTS
125
Jan. 15. Mr. Allen withdraws $5 from petty cash for personal use.
mdse.
Sell
Ota.
Jan.
of Jan.
7,
Note.
^Jan.
net.
Co.,
2/10,
net 30,
$127.00.
Jan. 24. Return mdse. purchased to Wholesale Grocery Co., $55,
to S. Sisson
and
purchases, $18.00.
Pay
Loomis
Wildwood Club,
$40.
$75 net.
Jan. 28. R. R. Rutherford pays account in full, $115.20.
Jan. 31. O. D. Dunn gives note due in 2 mo. int. at 6%
Jan. 27.
J.
Pay
bill of
in
payment
in
account.
help, $378.00.
The inventory
as at Jan. 31
is
$8,000.
CHAPTER XIX
THE VOUCHER REGISTER
The Voucher Register is an evolution of the Purchases Journal
brought about by the suggestion that the Purchases Journal
might be made to serve the purpose of both the Purchases Journal
and the Accounts Payable Ledger. It is a book provided with
columns for the creditors' names and for the proper distribution
of the charge or purchase.
There is an endless variety of forms
of the Voucher Register, of which the following is one illustration
(page 127).
The Voucher System. With the Voucher Register it is customary to inaugurate a more or less comprehensive system of
vouchers. Vouchers are documents printed uniformly in pads,
numbered consecutively, and so arranged that the distribution
of charges on one or more invoices (as many as it may be desirable
to pay with one check) can be indicated thereon.
Before an
invoice is vouchered it should be checked up with the goods
If the goods are as invoiced, it is authorized for
payment, the voucher is attached to it, and the charge distributed
properly thereon.^ It now becomes a voucher payable and an
entry should be made in the Voucher Register, the chaiges being
distributed in the proper columns.
As many columns may be
provided for the distribution of the charges as may be desirable.
In the Voucher Register shown above there are but two distribution columns.
These might be expanded to ten, or more, if
necessary.
If there is a charge for which no special column is
provided, it must be entered in the "sundries" column. The
number of the voucher is entered in the column headed "No.,"
received.
and the facts with reference to the invoice are entered in the
columns headed "Invoice." The amount of the voucher is
entered in the "Vouchers Payable" column, the total of which
' Sometimes the invoice is not sent to the receiving department to be
checked up with goods received. Instead, a duplicate of the purchasing
order, with the items omitted, is sent to the receiving department to be
filled in by the receiving clerk.
This is then compared with the invoice. In
this way carelessness in checking the invoice is prevented.
126
127
is
0)
>!
accounts payable
controlling account.
The voucher with invoice attached
is now filed in an Unpaid Vouchers'
File, where the arrangement may be
made alphabetically, or according to
time of payment. When a check is
issued in payment of the voucher note
to that effect is entered in the column
the place of
the
number
of
the
check.
the check
o
o
o
"5
a
O
CO
tf
J3
.S
V
ct
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o
o
o
f-^
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o
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ffl
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able account.
When
CO
iJCk
The
ment
IN
OS
>,
the
o
o
o
lO
O
O
o
o
'o
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>
^Z
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ft
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>-
tJ<
128
liabilities.
CHAPTER XX
THE VOUCHER REGISTERPRACTICE
The
exercise given in
Chapter XVIII
is
is
some changes
among
decide to install a
ing books:
1.
Cash Journal.
5.
Voucher Register.
2.
General Journal.
6.
3.
Sales Journal.
7.
4.
8.
make an
analysis
of Allen
and Goodloe:
Balance Sheet, Allen and Goodloe, as at January
Buildings and
Land
$22,500 00 Capital A. J.
10,310.00 Capital R. T. Goodloe.
Accounts
Insurance Prepaid
Furniture and Fixtures
Salaries Prepaid
Vouchers
4,312.00
14,300.00
Payable
(Schedule II)
200.00 Mortgage on Buildings
3,317.00
9,055.00
900 00
500.00
.
3,200.00
250. 00
$42,172.00
9
1919
Liabililits
Inventory, 1/1/19
Notes Receivable
Cash
1,
and Capital
Allen
$15,500 00
Assets
129
$42, 72 00
130
Schedule
Ltste of Accounts Receivable, Allen
and Goodloe, as
Name
M. Odgen
B. Brewer
J.
L.
at
January 1, 1919:
Amount
$ 217.40
100.00
27. 12
K. Cortland
O. D. Dunn
R. R. Rutherford
A. K. Cornwall
The Wildwood Club
N. N. Smith
B. A. Burton
L. D. Donovan
A. A. Alden
G. J. Winters
M. S. Gates
K. N. Brown
D. F. Swift
S.
L. O.
328.05
10.40
813.50
1400.00
310.00
43. 10
77 11
.
350.50
43.70
15.70
11.75
73. 10
112.00
200.00
3.12
175.45
Dent
S. S.
Sutherland
J. J.
Oliver
K. Cousin
S.
$4312.00
Schedule
List of Vouchers Payable, Allen
Name
&
Burton
Fitch
II
$213.00
net
net
2%
off to
275.40
and
&
1%
Jones
Allen
&
&
2%
off to
Sons
Allen
net
net
net
net
These
and
cluding Jan. 2
net
S.
Note.
and
none
none
$2.70
in-
eluding Jan. 5
net
L.O.March
S.
off to
1919:
Discount
in-
cluding Jan. 7
Atkins
1,
622.30
125.73
23.00
none
371.03
380.00
320 00
140.00
600 00
225.00
7.57
none
none
none
none
none
1.27
in-
$3295.46
The number
is
purposely
131
of ordinary journal
one sheet (double) being suflficient for this exercise.
Head the two columns on the left side, Accounts Receivable and
Sundries, respectively, and on the right side. Vouchers Payable
paper,
Stationer}'
and
Date
Printing
Sundries
General
Expense
Withdrawals
Purchases
Advertising
Account
Amount
as are
132
and Sundries. The first three columns are debit columns and
the last three columns are credit columns.
To construct the Voucher Register use a single sheet of twelvecolumn journal paper. Head the columns as shown below,
making such alterations and additions as may be necessary to
bring
it
when the Voucher Register is properly conmake most charges through it; consequently the
It is possible,
structed, to
tion:
Name
Name
of concern.
of creditor.
Voucher No.
Check No.
Details of items purchased.
Approval of proper
officials.
Receipt of creditor.
Upon
therein as follows:
Capital A. J. Allen
Capital R. T. Goodloe
Buildings
Inventory
page
page
page
page
1,
top.
1,
middle.
2,
top.
2,
middle.
Insurance Prepaid
Furniture and Fixtures
Notes Receivable
Cash
Salaries Prepaid
Vouchers Payable
Mortgage on Building
133
3,
top.
3,
middle.
4,
top.
4,
middle.
5,
top.
6,
top.
6,
middle.
numbering them
in the Vo.
No. column,
1, 2, 3,
and so
on, enter-
check mark ( K ) beside each amount to indicate that it has already been carried to the General Ledger through the opening
journal entry. Total the vouchers payable and the discount on
purchases columns and under the totals draw double lines.
The totals should be $3295.46 and $2L54, respectively.
In practice the unpaid vouchers are filed in an Unpaid Vouchers'
Tickler.
When paid they are transferred to a Paid Vouchers'
File.
Sometimes the practice is followed of attaching the returned check to the paid voucher; sometimes the returned checks
month
Pay the Daily News Co. with check, $10 for current advertising.
1.
on account to B. A. Barton, mdse., $15.20, and to G. J. Winters $61 .75.
Pay from petty cash, $0.75 for a telegram (General Expense) and $1.20 for
Jan.
Sell
stationery.
Note.
Enter
under Payment, and "Ck. #1 " in the How Pd. column. Charge
Vouchers Payable in the Cash Journal, $10.00. Enter the sale
to B. A. Barton in the Sales Journal, placing the amount in the
Totals column. This entry differs from an entry in the General
Journal in that but one line is required, thus:
B. A. Barton
Extensions Totals
15.20
Also
make
J.
Winters.
134
^3
"Cash"
\Q
in the explanation
column, "13" in
amount (make
it
$100)
SO-
entered
separately,
the distribution
proper columns.
ceding chapter
>C=
its
may
be combined and
made to the
As explained in the prepurpose is to avoid drawing
the total
2:>
Jan.
2.
Pay Johnson
&
Co. in
3v
full of
amount
account,
of
2%.
This illustrates one of the several complications likely to arise in connection with the
la
the
discounts will
voucher
should
be
be
all
If it is known
new books that
taken,
made out
then the
net
for the
135
column.
This
making
of
all
is
the best
is
certainty
made out for the net amount and the discount entered in the
Discount on Purchases column in the Voucher Register. Follow
this plan, as all discounts will be taken.
Make entry in the
Cash Journal entering the net amount in the Vouchers Payable
column and writing the name
of the
column.
Sell on account to O. D. Dunn, $120.15, and to L. O. Donovan,
G. J. Winters pays account in full. Petty cash payments for
General Expense, $8.40.
Jan. 4.
Pay Atkins and Jones in full of account, taking the discount of
Jan.
3.
$62.30.
1%.
Jan.
6.
discount of
Cash
Grocery Co.
Receive invoice from the Whole10 days, net 30 days. Petty cash
advertising, $8.30; general expense,
2%
Note.
Cash Journal.
in the Sundries
Since
it
is
column
in the
all
cash
day.
Jan. 8.
Receive invoice from Allen and Allen
and mdse., $100, terms 2/10, net 30.
for
show
136
made
out.
Jan. 9.
Pay Burton and Fitch voucher payable no. 1 for $21.3.00; also
Clyde Manufacturing Co. voucher payable no. 2, $275.40. Petty cash
payments: purchases, $11.40; general expense, $6.37.
Jan. 13.
Receive invoice from Gordon & Smith, mdse., $110.00, net
15 days. Pay Gordon & Smith voucher payable no. 11, $225.00.
Jan 14. Receive invoice from J. Loomis, for furniture for store, $75.00,
net 15 days. Sell on account to R. R. Rutherford, mdse., $15.00. Pay help
for two weeks, $350.00.
Enter voucher for petty cash payments made and
draw check to replenish the fund. Cash sales for week, $872.41,
Note. The voucher is made out for the full amount of tl.o
wages and entered in the Voucher Register. Write "Cash for
wages" in the explanation column. Next make entry in the
Cash Journal for check drawn for that amount. From this
cash fund the individual wage earners are paid.
In entering the voucher for petty cash in the Voucher Register,
write, "Cash for petty cash, 2 wks." in the explanation column
and
distribute the
amount properly
Sell
$18.92.
Jan. 17.
Note.
receiving
credit,
$10.20;
Returned
column
137
Jan. 20.
Petty cash payments: R. T. Goodloe, withdrawals, $11.00;
purchases, $8.40; general expense, $5.10.
Pay L. O. March voucher payable no. 5, $23.00; also S. Tompkms & Son, voucher payable no. 9, $140.00.
Jan. 21,
payable no.
Jan. 22.
Cash
16, $110.00.
purchases, $18.00.
Note.
The
Sisson
&
Sons
illustrate
some
of the possible
register is used.
In the case of
S. Sisson
&
Sons,
is
for the
it will
If
to cancel
amount
necessitate
Sell
Jan. 27.
Pay
138
adjoining building from A. A. Smith for $4000.00, paying $1000.00 cash and
giving note due in 6 mo. for balance.
to Furniture
in
Interest on the mortgage on Buildings is at 6%, payable semiannually June 30 and Dec. 31. Make entry for interest accrued
on the mortgage in the General Journal. Take a trial balance
of the General Ledger.
Submit a Profit and Loss Account and
a Balance Sheet. The inventory as at Jan. 31 is $8,000.
CHAPTER XXI
THE PRIVATE LEDGER
of setting
final trial
at
Graham^Capital
$10,000
Real Estate
Inventory. Dec. 31, 1916
$ 8,000
5,000
Cash
800
Accounts Receivable
Accounts Payable
Mortgage
3,000
2,000
4,800
$16,800
If>
his capital
$16,800
account and
Graham Capital
$10,000
4,800
Mortgage
To Real
Estate
$8,000
6,800
Private Ledger
139
140
is
posted a
trial
appears:
Inventory, Dec. 31, 1916
Private Ledger
$5,000
$6,800
Cash
Cash
800
800
Accounts Receivable
Accounts Payable
3,000
2,000
$8^800
$8,800
is
General Ledger
Real Estate
To
Allen
made:
$6,800
8,000
Graham Capital
$10,000
4,800
Mortgage
trial
balance
$ 6,800
8,000
Graham Capital
$10,000
4,800
Mortgage
$14,800
$14,800
in
credited, thus:
Cash
$2,000.00
To Private Ledger
and in the Private Journal the following entry
General Ledger.
To Real Estate
.
.
".
$2,000.00
required:
2000.00
is
2000. 00
way any
Private Ledger.
141
may
be kept in the
up the
Profit
and
Loss account in the Private Ledger by closing out the debit and
credit nominal accounts into the Private Ledger account in the
General Ledger, and then in the Private Journal, charging the
debit nominal balances to profit and loss and crediting General
Ledger account, and crediting the credit nominal items to profit
and loss, at the same time charging General Ledger account.
CHAPTER XXII
THE PRIVATE LEDGER PRACTICE
Problem
1.
Following
is
Amos
Chandler,
Amos
$18,500
Chandler, Capital
Buildings and Real Estate
$ 8,400
900
Cash
Accounts Receivable
Notes Receivable
2,700
6,000
400
2,000
200
400
Supplies
Accounts Payable
Investments
100
2,500
$21,500
Chandler desires to
for capital,
set
up a Private Ledger
$21,500
to contain accounts
Show
balances for
entries
Solution, Problem
1.
is
as
follows:
Amos
Chandler, Capital
$18,500
2,000
Mortgage on Buildings
To Investments
To
Private Ledger
transfer accounts to
$2,500
18,000
Private Ledger of
Amos
Chandler.
The entry
is
as follows
General Ledger
Investments
To Amos Chandler, Capital
$18,000
2,500
18,500
2,000
Mortgage on Buildings
To
142
Amos
143
General Ledger:
$8,400
Cash
900
Accounts Receivable
Notes Receivable
2,700
6,000
400
200
400
Accounts Payable
Private Ledger
$ 1,000
18,000
$19,000 $19,000
Trial Balance, Private
Ledger
General Ledger
Investments
Amos Chandler, Capital
Mortgage on Buildings
$18,000
2,500
$18,500
2,000
$20,500 $20,500
Make
$2,000 of
proper entries.
Cash
Accounts Receivable
Notes Receivable
Inventory, 1/1, 1920
General Expense
Purchases
$8,400
3,000
2,800
400
6,000
700
13,700
$15,000
Sales
Supplies (consumed)
Furniture and Fixtures
Accounts Payable
Private Ledger
Amos
300
400
1,200
19,500
$35,700 $35,700
144
BIBLIOGRAPHY
Part
Dickinson,
A.
L.
Chapter
1913.
III.
Accounting
Practice
and
Procedure.
New
York,
I.
I.
PART
IV
CORPORATION ACCOUNTING
CHAPTER XXIII
THE CORPORATION SPECIAL CONSIDERATIONS
Corporation Defined.
The corporation
on a
is
a form of organiza-
commend
it
to
most enter-
It affords certain
advantages which neither the sole proprietorship nor the partnership enjoys.
On the other hand certain requirements are imposed
upon the corporation from which the other two forms of organization are free.
Advantages of Incorporation. Perhaps the two most important considerations that lead to incorporation are (a) the need
for limited liability,
and
(6)
the corporation.
10
145
146
Limited Liability.
who
may
enterprise.
difficulty
if
necessary.
What
any
this limitation
is is
of the state in
holdings.
difficulty
when
it
is
needed.
The corporation
is
well
When
there exists a
sum
surplus.
The amount
ized to issue
is
is,
which a corporation
of the stock
any time
after incorporation,
total of
it is
is
called
author-
The amount
is
outstand-
stock.
Usually the amount of the authorized stock is placed at
a considerably higher figure than the amount which the corporation will care to issue for a considerable time; thus a portion of
the authorized stock is held in reserve to be issued when, in
future, more capital is required.
Moreover, the number of
shares of stock is usually so large that the worth of a single share
Each share
is
147
generally given an
much
less,
is
The
may
Status of Stockholder.
or open.
by a comparatively few
is
usually held
all
by
148
number of stockholders and many transmade from sellers to purchasers. The number
usually a considerable
fers of stock are
There are
such
is
For
this
name
of each stockholder, the number of shares of stock purchased by him, the date of the transfer, the number of the stock
certificate issued to him, and such other data as may be desired.
In some states, as New York, the form of the stock ledger is
prescribed by law.
when the
last instalment
The
name of the
the number of
may
made
is
issued
in their place.
As
As
of
Noy.
of date
30, 1919.
books were
last closed in
149
day, for speculative purposes. When this is done stock cermay be assigned in blank, i.e., the seller may sign away
tificates
by merely placing
have a new
Dividends.
own name.
to be invested.
These who
invest
money
is
said
in stock expect to
and so
its
on.
operations
which
it
capital intact
150
Common and
finds
it
leges.
Preferred Stocks.
Sometimes
a corporation
advisable to issue stocks with varying qualities and priviWhen only one kind of stock is issued it is all common, but
may
advantage
to assets, or both.
method
will
common
by the
will receive
it
a dividend equal to
more. Profits remaining for distribution after the initial requirements of both classes of stock have been met may be divided
between the two classes of stock on some pre-arranged basis, or
possibly they may be retained as an addition to working capital
or be invested in extensions and improvements.
Cumulative Preferred Stock. If the preferred stock is cumulative, then in case there are not sufficient profits in any one
year to satisfy its dividend requirements, whatever remains
unpaid becomes a lien on the profits of succeeding years. Sometimes the unpaid dividends on the preferred stock accumulate
to a very large amount, thus placing the common stockholders
in a position where little hope exists of receiving any dividend for a very long time to come. For a long time preceding
the outbreak of the European War in 1914, the International
Mercantile Marine Company did not pay dividends on its
cumulative preferred stock with the result that these accumulated and unpaid dividends have since amounted to a sum
almost equal to the par of the stock itself.
Factors Determining Market Values. When both preferred
and common stock are outstanding the two kinds of stock will
sell at prices which are determined by a number of factors, such
as the value of the assets, the general prosperity of the company,
may
151
affect
the stocks, and the condition of the market and business gen-
erally.
Company
Railroad
Subscribers
payment
is
changed
for
made
in
full-paid,
This requirement
make
it
is
company.
Bonded Indebtedness.
many
Although
additional funds.
issue of
bonds
is
are to corporations
152
concern for the same reason that a partnership fails to secure it,
lack of appeal to a sufficiently wide portion of the investing
public.
When money is secured upon a mortgage the entire sum
must generally be secured from a single person or institution.
Individuals may easily be found who are willing to loan sums
mounting up into the thousands of dollars; and some institutions,
such as banks, sometimes loan very large sums of money to companies which provide suitable security. Since, however, it is
not the province of banks to provide capital for long term investments, and since they usually wish to loan on security other than
viz.,
real estate, it
becomes desirable
for
ing large
sums
The Deed
of
some
of
number
use of bonds.
An
by a mortgage,
But the deed of
or,
issue of
as
it is
trust, not
of creditors,
is
Stockholders and Bondholders Compared. The chief disbetween a stockholder and a bondholder is that the
stockholder is a proprietor while the bondholder is a creditor.
The stockholder receives dividends only when profits are earned;
nor can the stockholder compel the board of directors to declare
tinction
153
before stock,
it is
of their lien,
bonds must be
satisfied
safety
is
entirely relative.
of the assets
purpose.
Advisability of Issuing Bonds.
exhausted.
is
a matter of policy.
5%
at
If
money thus
164
the books.
In
must be applied
organization.
brief,
entries in
CHAPTER XXIV
THE CORPORATION OPENING CORPORATION BOOKS
Work of the
Promoter.
it
to discuss the
is his
duty to
company. When enough stock has been subscribed the company is organized and the subscriptions become contracts
between the subscribers and the corporation.
The Opening Entry Stock Authorized. As soon as the company is organized the books of account should be opened and
entry made of whatever information of a financial character
may be necessary to show clearly the status of the company.
The Minute Book, in which a record is kept of all proceedings
at the meetings of the stockholders and board of directors,
may be consulted in order to obtain whatever information
way
in the
historical
development, purposes,
etc., it
may
be
Natur-
its
stock,
the charter.
scribed.
166
166
One Hundred
July
Unissued Stock
To Authorized Stock
Being the total authorized stock of the
$100,000.00
$100,000. 00
is:
is
as follows
made:
To Unissued Stock
To enter upon the records the liabilities of the
sundry subscribers to the stock of this company, as per the following schedule
A. R. Brown
450 shares
L. M. Allen
300 shares
50 shares
R, T. F*rince
L. O. Gordon
40 shares
10 shares
O. S. Smith
X"
$85,000 00
.
$85,000.00
common and
both
names
by
of
Common
57
suitable explanations,
of
is
Stock
...
of stock authorized:
Subscribers (or Subscriptions)
To
Capital Stock
(Explanation as in
Payment
operations
(o)
above.)
of Subscriptions.
it
and
possible
would be to have
all
amount
of
be journalized thus:
Cash
To
To
$75,000.00
$75,000.00
Subscribers
record the
payment
Company,
scribers
of the following:
and number
(Names
of shares
of sub-
bought by
each).
all
In
many
instances
it
not in-
take over enterprises which have been established under partnership organization.
and intention
In such cases
of the partners to
it is
pay
158
stock of the
new company by
transferring to
it
their partnership
Usually, too,
it is
some of
by means of stock. This is a legitimate procedure since promotion and organization expenses, unlike the expenses of operation,
are looked upon as investments and become a portion of the
Where, therefore, property or services
assets of the company.
payment
of stock subscriptions these must be
are received in
charged, instead of cash, and the subscribers' account credited.
Payments in Instalments. Sometimes, especially in the case
of those who agree to pay for their subscriptions in cash, it is
not desirable, either from the standpoint of the company or the
subscribers, to require the immediate payment of the full amount
of the subscriptions.
Not only do subscribers find it more convenient to pay in instalments, but the company does not usually
need all the cash at once. Hence the payments are usually
made, in part when the company commences operations, and
the balance in a given number of instalments. If the subscribers
to the stock of the Brown- Allen Company agree to make payment
in four instalments, one when operations are begun and the
balance in three equal monthly payments, the following entry
be sufficient to
will
Instalment
Instalment
Instalment
Instalment
Number
Number
Number
Number
make formal
2
3.
To Subscribers
To charge instalments Nos. 1, 2, 3 and
respectively on the day when the Brow
Company
day
4,
due
-Allen
As the instalments fall due cash account or other proper account is charged and the instalment account is credited. Thus, if
Instalment Number 1 is paid in cash, the entry is:
Cash
To Instalment Number
Similar entries must be
fall
$17,500 00
.
made
$17.500 00
.
CHAPTER XXV
PROPRIETORSHIP AND PARTNERSHIP
INCORPORATED
As has been noted, corporations are frequently organized to
continue a business hitherto run by a sole proprietor or by
partners.
When this is the situation the assets owned by the
individual proprietor or by the partners become the assets,
or at least a portion of the assets of the corporation.
The
cor-
it
by individuals
This is
and partners who do not possess the requisite amount of capital
to make needed improvements or extensions, and who can, by
this agency, appeal to a large number of investors.
oftentimes the plan followed
supplants.
Valuation of Assets.
When
this is
when
done
it is
transferring
it
to the corporation,
in this organization.
of goods,
On
likelihood
of
terests their action will operate against the future welfare of the
company by making
The solution
others.
difficult
of the question
may
160
The above
of valuing goodwill
make
to the
Liabilities.
of the assets
If
and
liabilities
properly kept the closing balance sheet of the old concern will
This statement
is
now used
and
receives
and the
liabilities
Goodwill.
which
it
it
for
assumes.
made
in the old
balance sheet:
Balance Sheet, Brown and Allen
Real Estate
Merchandise
Accounts Receivable
Cash.
.
$27,000
6,000
16,000
Brown, Capital
Allen, Capital
$30,000
20,000
6,000
7,000
$56,000
$56,000
Brown and
161
them
in
journal entry will serve to charge goodwill and credit their respective capital accounts, which
we assume
are to be credited in
$25,000.00
To Brown,
$15,000.00
10,000 00
Capital
Allen, Capital
Real Estate
Goodwill
Merchandise
;^counts Receivable
Brown, Capital
$27,000
25,000
6,000
16,000
7,000
Cash
Allen,
$45,000
30,000
6,000
Capital
Accounts Payable
$81,000
$81,000
The balance
sheet
now
it
under the
title.
This
title
will
names
all
other
accounts in the old books, providing new books are to be installed, let us consider the factors which will determine the capitalization of the corporation.
Two prime considerations are (a)
Allowance
present requirements and (6) future requirements.
must be made
for
the capitalization.
to permit
all
desirable expansion.
unnecessarily large
it
will
On
by becoming owners
if
made
Prob-
the corporation
of a
11
162
these
two
classes of subscriptions.
To
Subscribers
A variation
to
show
is:^
$2,500.00
2,500 00
2,500 00
2,500 00
.
$10,000.00
163
desirable.
The entries necessary to bring into the company's
books the assets and liabilities of the firm of Brown and Allen
will vary according to conditions.
If the old books of Brown
and Allen are to be closed and a new set of books opened for
the Brown-Allen Company a different procedure will be required
than if the old books are to be continued. In the former case
all of the accounts in the old books will be closed and new
accounts will be opened in the new ledger of the Brown-Allen
Company for the sundry assets purchased and liabilities assumed. In the latter case only the partners' capital accounts
will be closed in the old ledger and such new accounts opened as
books requires the simpler procedure let us first consider the adjustments necessary when they are continued by the corporation.
When Brown and Allen subscribed to the stock of the BrownCompany they were charged as subscribers in the journal.
Allen
amount
Brown and
as their subscriptions,
measured by
and
Capital,
Brown
$45,000 00
30,000.00
.
Capital, Allen
To
$75,000.00
Subscribers
ledger should
now appear
thus:
Subscribers Account
To Unissued
Stock
$85,000
By
By
By
By
By
By
Instalment
Instalment
Instalment
Instalment
Capital,
No. 1
No. 2
No. 3
No. 4
....
Brown
Capital, Allen
$85,000
The
$ 2,500
2,500
2,500
2, .500
45,000
3,000
$85,000
shown by
New Books
poration
it
will
If new books are installed for the corbe necessary to close not only the partners'
Opened.
164
accounts in the old books, but all others as well. At the same
time that the asset and liability accounts in the old books are
In
closed they are opened in the new books of the corporation.
the partnership books the Brown- Allen Company is charged with
the value of the assets which are to be turned over to it and
credited with the amount of the liabilities which it is to assume,
thus:
Journal,
$81,000.00
$27,000.00
25,000.00
6,000.00
16,000.00
7,000.00
Goodwill
Merchandise
Accounts Receivable
Cash
Accounts Payable
To The Brown-Allen
$6,000.00
Company
To credit The Brown- Allen Company with
6,000.00
As a
is
'
result of the
charged in
by Brown and
Allen,
upon
is
made:
Company
$75,000 00
To The Brown- Allen Company
To charge the capital stock of The Brown- Allen
Company for the amount received, $75,000, this
being the consideration for which Brown and Allen
agree to sell their interests to The Brown- Allen
Company.
are:
$75,000 00
the books of
Brown
Brown
165
credited with
Capital, Allen
is
Brown
$45,000.00
30,000.00
Capital, Allen
To
Capital Stock of
$75,000 00
.
made
thus:
Real Estate
Goodwill
Merchandise
Accounts Receivable
Company
$27,000.00
25,000.00
6,000.00
16,000.00
7,000.00
'
Cash
To
Subscribers
firm of
$75,000 00
6,000 00
.
Accounts Payable
To charge the assets purchased from the
liabilities
The
Trial Balance.
the Brown-Allen
Company are
trial
balance
appears thus:
Trial Balance, the
Instalment No. 1
Instalment No. 2
Instalment No. 3
Instalment No. 4
Real Estate
Goodwill
Merchandise
Accounts Receivable
Cash
Brown-Allen Company
$2,-500
2,500
Capital Stock
Accounts Payable
$85,000
6,000
2,500
2,500
27.000
25,000
6,000
16,000
7,000
Sg 1,000
$91,000
166
If
and Au-
In
with S15 000 and Authorized Stock would show a credit balance
would not appear on
The procedure
in case of a corporation
chase an established business, but secures funds for the construction of its plant, etc., entirely through the sale of stock for cash
differs
CHAPTER XXVI
THE CORPORATIONACCOUNTING FOR BOND ISSUES
sale,
issue
at par.
and conditions
Again,
in
established concern
what
it
of 1907
when money
is
scarce,
may
find
it
investors shy,
considers
many
168
short term
securities
is
frequently
From
simplest situation
is
There
is
Cash
".
To Bonds
To charge
amount
sold, at par.
If the following
Company
indicates
$15,000
cash)
5,000
Goodwill
10,000
Capital Stock
$25,000
Accounts Payable
$30,000
5,000
$30,000
$15,000
Capital Stock
cash)
15,000
Bonds
Goodwill
10,000
Accounts Payable
$25,000
10,000
5,000
$4 0,000
$40,000
$9,000.00
$1,000-00
Discounl on Bonds
To Bonds
The balance
169
$10,000.00
sheet
now becomes:
$15,000
cash)
14,000
Discount on Bonds
Goodwill
1,000
Capital Stock
$25,000
Bonds
10,000
Accounts Payable
5,000
10,000
$40,000
$40,000
If,
sell
at a
premium
is
of 10 per cent
sale
Cash
$11,000.00
To Bonds
$10,000. 00
Premium on Bonds
1,000.00
Thus
amount
of the bonds.
is
annum
$9,000.
we
Moreover,
In this instance
it is
clear that
$500 (5% of $10,000) plus onetwentieth of the discount on the bonds, which is $50 (1/20 of
is
170
their
profit
and
loss
required to bring into the books the real interest charge for each
month
Profit
is:
and Loss
To
$45.83
$41 67
Interest Accrued
4.16
Discount on Bonds
To charge Profit and Loss with the month's burden
of interest accruing on bonds, and to credit Interest
Accrued with the nominal rate of interest, and Discount on Bonds with the month's proportion of that
expense, the same being a charge to Profit and Loss.
when the
Later
interest falls
due and
is
paid,
presumably
and Cash
is
is
charged
credited, thus:
Interest Accrued
$250 00
.
To Cash
'
$250.00
Small
Discrepancies
business transactions,
in
it is
Interest
Calculations.
Since,
in
sum
the
above
some
number
figures,
months
of years the
171
$250.02
To Cash
Profit
$250.00
0.02
and Loss
and Loss.
Cash
sale follows:
$11,000. 00
To Bonds
$10,000 00
1,000 00
.
Premium on Bonds
The nominal
is,
is
5%.
$11,000 actually received for the bonds; the second factor is the
premium on the bonds, of which 1/20 should be written off each
may
and Loss
$37. 50
Premium on Bonds
4.16
To Interest Accrued
To charge the Profit and
$41 66
.
If interest is
$250, as
Accrued
shown above.
is
Any
172
Premium
we
foregoing discussion
Affects
see that
Profit
if
either a
at a discount, the
made
to Profit
amount
and Loss.
If
the bonds
sell
over the time the bonds run, the amount applicable to each period
being added to the actual interest paid, i.e., the nominal interest,
bonds
sell
at a
Loss.
When bond
discount and
premium
The student
is
referred to
of these questions.
works
CHAPTER XXVII
THE CORPORATIONREDEMPTION OF BONDS
Redemption
An
may
be redeemed
bonds may be
drawn each year by lot and purchased by the issuing company,
being redeemed at par or some other figure. On the other hand,
the whole issue may remain outstanding until the expiration of
Accordingly
the period prescribed and then be redeemed in toto.
bonds are classified as serial and sinking fund, depending upon the
mode of payment. A third classification includes those bonds
which are issued with the expectation, not of paying them off, but
of refunding them, when the time over which they run expires.
That is, new bonds are issued in exchange for the old ones. The
advisability of issuing a given kind of bonds must be determined
by the character of the issuing company and the purpose of the
serially,
that
is,
of
Bonds.
a given
issue of
number
bonds
of the outstanding
issue.
Bonds Issued in Perpetuity. We have learned that it is frequently of advantage to a company to trade on the equity of
borrowed funds. Consequently it may be desirable for a company
to establish a permanent
perpetual
obligations,
for
practical
scarce, short
purposes.
When
interest
capital
174
let
Fixed Assets
Accounts Receivable.
Cash
Capital Stock
$2,000,000
310,000
Accounts Payable
$2,310,000
$2,310,000
If the bonds are sold at par and the returns invested in land or
other fixed assets, the balance sheet becomes
$3,000,000
.
Cash
200,000
110,000
Capital Stock
$2,000,000
Bonds
1,000,000
Accounts Payable...
310,000
$3,310,000
$3,310,00
of ten years,
meanwhile distributing
profits to stockholders,
and
then use whatever available assets there may be to pay off the
bonds? If we reserve $1,000,000 of the profits, then at the end of
ten years, but before the bonds are redeemed, the balance sheet
will
Fixed Assets
Accounts Receivable...
Cash
$3,000,000
200,000
1,110,000
Company:
Capital Stock
Bonds
Accounts Payable
Profit and Loss
Bonds
is
made:
$1,000,000.00
To Cash
after
1,000,00
$4,310,000
$4.310,000
When
$2,000,000
1,000,000
310,000
$1,000,000.00
175
Accounts Receivable.
Cash
Capital Stock
$3,000,000
200,000
110,000
Accounts Payable.
Profit and Loss
$3,310,000
An
$2,000,000
310,000
1,000,000
$3,310,000
$2,110,000
200,000
Cash
11 0,000
Capital Stock
$2,000,000
Bonds
Accounts Payable.
1,000,000
.
$3,310,000
310,000
$3,310,000
loss.
becomes
Balance Sheet, Royal Manufacturing Company
Fixed Assets
Accounts Receivable
$2,110,000
200,000
$2,310 ,000
Capital Stock
Accounts Payable.
$2,000,000
310,000
$2,310.000
which leaves the company with assets of the same value as before
the consequence of redeeming bonds out
of capital.
is
176
machinery
Then, if no reservations
are made to cover depreciation, the balance sheet, after the bonds
are paid, becomes:
invests the $1,000,000 secured
by the
sale of bonds, in
$1,110,000
200,000
Capital Stock
Accounts Payable
$2,000,000
310,000
1,000,000
Deficit
$27310^
Depreciation a Factor.
In
$2,310,000
most cases
for
personally responsible.
$1,000,000
less.
make
177
whose duty
to invest them as profitably as is conand thus to hold them for the protection of
it is
to illustrate,
we
require ten
it will
Fund Trustee
To Cash
To record payment of cash
$100,000.00
Sinking
$100,000.00
to the trustee accord-
Cash
$3,000,000
200,000
1,000,000
Capital Stock
$2,000,000
Bonds
1,000.000
Accounts Payable
Profit and Loss
310,000
1000,000
110,000
$4,310,000
When
$4,310,000
Bonds
is
made:
$1,000,000.00
To
Sinking
Fund
$1,000,000.00
Although there
is
as to
prin-
12
178
To
$4,166.67
Interest Accrued
$4,166. 67
Interest Accrued
$25,000 00
.
To Cash
$25,000. 00
Thus the
liability
The same
so on.
process
is
fund
may
be
(a)
is
closed,
six
Interest
If it
Entries must be made to record this interest.
added to the sinking fund the following entry is made monthly:
business.
is
When
'
179
Sinking
sink-
Cash
To
To
Sinking
Fund Trustee
amount
of interest received
company.
CHAPTER XXVIII
THE CORPORATIONROUTINE ACCOUNTING
PROCEDURE
to indicate proprietorship
The amount
shown
to carry the undistributed part of net profits to the capital accounts in accordance with some prescribed procedure, but in
corporation accounting separate capital accounts are not kept
or the stockholders.
is
is
sometimes a
is
issued, neither of
which transactions
For
this reason it
account.
180
181
31, 1919:
$100,000
55,000
12,000
Inventories
Current Assets
Capital Stock
Other Liabilities
Reserve for Depreciation,
$167,000
$150,000
12,000
5,000
$167,000
is
is
in, result-
carried to Surplus.
The
as follows:
$100,000
60,000
20,000
Inventories
Current Assets
Capital Stock
$150,000
Other Liabilities
10,000
Reserve for Depreciation.
10,000
Surplus
10,000
$180,000
net profits
$180.00
is
carried to Surplus
and Loss
is:
$10,000
To Surplus
To carry net
$10,000
profit for the year ending
Disposition of Surplus.
The
in the
power
of the
182
made to
finance additions
and bet-
Cash
$11,000
To
Capital Stock
Surplus
To record sale of capital stock at 110, the
premium being credited to surplus.
$10,000
1,000
Corporate Surplus
Profit
The
first five
items
in-
this
The
first
investments.
183
of outstanding
stock.
Dividends.
The
profits
accruing to a corporation
may
be
dividends.
How much
of
the
profits
shall
be
retained
to
decide.
that
Dividend Defined. A dividend is a distribution of accumuamong a given class of stockholders. If but one
class of stock is outstanding the distribution is made on a pro
rata basis among all stockholders.
When, however, there are
two or more classes of stock outstanding a different procedure
may be followed for each class. Thus if there are preferred
and common stocks, and the preferred is, let us say, 6% cumulative stock, then the preferred stock dividend must be paid in
full before anything can be paid on the common; and if in any
lated profit
given year the profits are insufficient to pay the full amount of
the dividend on the preferred stock, then it must be paid in the
common
stockholders.
Kinds of Dividends. Dividends are of several kinds in accordance with the medium of payment. Cash dividends are most
frequent and consist in payment by check, or, in exceptional
Scrip dividends are paid in the form of
promissory notes of the company, which are at a later period redeemable in cash or other form of property. Stock dividends
are paid by issuing capital stock, either treasury or unissued, in
payment. Other forms less frequently used are property and
bond dividends, the former being paid by an actual distribution
of property and the latter by is.suing bonds.
Declaration of Dividends. The board of directors can rightfully declare a dividend only when sufficient profits exist.
It is
unlawful to pay a dividend out of capital and the directors
cases, actual cash.
184
may
may
Payable, thus:
Profit
and Loss
declared
board
of directors.
may
be charged.
made between
premium and Sur-
To Cash
In payment of dividend No.
If
draw a
number
of stockholders
amount
it is
customary to
of the dividend.
This
is
The
segregates the
is
should be noted that when a cash dividend is paid the corpoits assets by the amount of the dividend,^ whereas
ration reduces
is
in assets occurs
185
is
paid.
the principle which has led the courts to declare that the
income to the
and
all
it is sufficient
They
and
ment
Chief
among
these are
Minute Book
Record of Subscriptions
Stock Certificate Book
Register of Transfers
Stock Ledger
stockholders'
of holdings is given,
of all stockholders
CHAPTER XXIX
THE CORPORATION PRACTICE
Note.
Pro forma
Solution, Problem
Jan.
1,
July
1,
Jan.
1,
Jan.
1,
1919
1919
1920
1939
1.
Jan.
1919
1,
Cash
To
at
first
6%, due
semiannually.
July
1,
1,
1919
Bonds
To Cash
Interest on
1919.
Premium on Bonds
To Profit and Loss
One-fortieth of premium on bonds
applicable to
income.
Jan.
Interest
1,
1920
on Bonds
To Cash
For interest on bonds, due Jan.
Jan.
1920.
1,
1,
1920
Premium on Bonds
To Profit and Loss
One-fortieth of premium on bonds,
income.
186
applicable to
amounts omitted.
THE CORPORATIONPRACTICE
Jan.
1,
187
1920
Surplus
Sinking
1,
1920
Fund Trustees
To Cash
Annual payment
Jan.
1939
1,
Premium on Bonds
To Profit and Loss
One-fortieth of premium on bonds
Jan.
],
applicable to income.
1939
Surplus
Sinking
1,
1939
Fund Trustees
To Cash
Annual payment to sinking fund
Jan.
1,
trustee.
1939
Fund Trustees
To Sinking Fund Reserve
For interest allowed by sinking fund
Sinking
Jan.
First
1,
trustee.
1939
Mortgage Bonds
Sinking
1,
bM%
1939
Fund Reserve
To Surplus
To credit surplus with amount reserved therefrom
to retire bonds, now cancelled.
Note.
Interest, however, is
charged to income. The proportion of the premium on bonds
credited each six months to Profit and Loss is in the nature of
interest, being an offset to the interest charged, so that the true
This might h(ive been
interest cost is something less than 5.^%.
carried to Profit and Loss indirectly by first being credited a
188
nominal
which is
account,
as,
Amortization
entry.
of
Premium on Debt,
and Loss by a
closing journal
March
1918
1918
March 1, 1919
March 1, 1928
Sept.
1,
1,
Note.
differs
3.
its articles
is
its profits
its
at the
bonded
indebtedness
(a)
{c.
Give entries required when the bonds are paid off at maturity.
relation has the sinking fund provision to depreciation?
What
BIBLIOGRAPHY
Part IV.
Corporation Accounting
Bennett,
Bentley,
Bentley,
Cole, W.
1917.
Cooper, F.
Dickinson,
A.
THE CORPORATIONPRACTICE
Gerstenberg, C. W.
189
New
York,
1915.
Wood, W.
A.
Indianapolis, 1906.
PART V
FINANCIAL STATEMENTS
CHAPTER XXX
CONSTRUCTION AND INTERPRETATION OF THE
INCOME STATEMENT
Use
Income Statement.
On
191
192
portation company differ from both of the above. It is customary to separate the general profit and loss account into sections,
into each of which are brought those items which affect, or are
incidental to, a particular branch of the work.
Thus for a manufacturing concern the general profit and loss account permits of a
subdivision into not loss than four sections, possibly more.
These may be termed
Manufacturing Section
Trading Section
1.
2.
3.
4.
instead of
If
and
Administrative Section
Distribution Section
making such a
obscurity results.
for the
June
30, 1916:
Profit
for the
Co.,
month ending
30,
1916:
Raw
Materials,
Goods
May 30.
May 30.
.
$20,000
5,000
in Process,
Finished Goods
10,000
Raw
Goods
in Process,
June
Labor
4,000
Sales
Fuel
Freight In
Depreciation (factory)
1,000
Discount on Purchases
200
Rent
30.
.
4,000
9,000
20,000
of
Steam Power
500
700
40
General Expense
Interest
9,000
320
1,000
200
600
630
427
-20
Bad Debts
Rent
100
2,563
$55,200
The
100
Taxes (factory)
and
.$21,000
.
loss
account
is its
*55,200
upon
this
form of the
profit
..
It
is
desirable to
it is
net profit
know the
Consider the following
also desirable to
selling.
Profit
193
Co.,
30,
1916:
Manufacturing Section
Raw
May 31
$20,000
Process, May 31..
5,000
Goods, May 31
10,000
Materials,
Goods
in
Raw
Goods
Finished
Purchases (raw materials)...
9,000
Finished Goods,
Discount on Purchases
Labor
4,000
Rent
Fuel
Freight In
Depreciation (factory)
1,000
200
100
40
Taxes (factory)
$21,000
4,000
9,000
500
700
May 31.
May 31.
in Process,
of
Steam Power
14,140
ture
$49,340
$49,340
Trading Section
Balance, Cost to Manufac-
$14,140
facture
Advertising
$20,000
Sales.
320
Salesmen's Salaries
Discount on Sales
Balance carried to Administrative Section
Trading
1,000
200
4,340
Profit
$20,000
$20,000
Administrative Section
Salaries of Officers
General Expense
Interest
Bad debts
Rent
(offices)
600
630
427
20
100
..
$4,340
Section Net
Profit.
2,563
""
$4,340
$47340
Distribution Section
Balance, Net
P*rofit.
$2,563
$2,563
194
Variations in Usage.
of the profit
and
In
among accountants.
to be suggestive
may
item
profit
and
enterprise.
of sufficient cash to
make
make
to
(6)
sufficient
the ability to
to
good management.
The advocates
is,
of
showing the
amount
of the discounts
efficiency
195
would prove a
difficult
task.
Perhaps the best solution of the difficulty would be the aboliThere is really very little justification
for them.
They are the outgrowth of the delinquent methods
Their
fostered by the antequated system of open accounts.
introduction did not represent a step in advance but merely a
makeshift remedy for a system which has proven unsatisfactory.
There can be little doubt that it would be an improvement to
make sales net 10 days, or net 30 days, or for whatever time the
nature of the trade makes desirable. It is to be hoped that
the adoption of the trade acceptance will remedy the situation,
although it is by no means necessary to abolish cash discounts in
tion of all cash discounts.
make
order to
may remove
of bills a habit
cash discounts.
of abuses that
But by making
prompt payment
may
it
rise to
a variety
thus be ended.
account.
be sufficient to cover
all
of sales
costs of
Sales
Deduct
Net
Cost to Manufacture
Cost of Selling
Cost of Administration
.
Profit
This
is all
information.
right as far as
It requires
: :
196
Profit
Co.,
$20,000
14,140
Sales
Month Ending
100%
5,860%
Advertising
Salesmen's Salaries
Discount on Sales
320
1,000
200
$1,520
Administrative Expenses:
$600
630
427
20
Salaries of Officers
General Expense
Interest
Bad Debts
Rent
100
(offices)
Net
2,563
Profit
Distribution of
Reserve
Reserve
3,297
$1,777
Net
for
for
Profit:
Contingencies
Extensions
500
1,500
1,000
Surplus
$],063
may
this
Profit
Sales
May 31
May 31
Goods, May 31
Materials,
Goods
in Process,
Finished
Raw
Month Ending
$20,000
Raw
Co.,
Materials, June 30
Goods
in Process,
June 30 ...
$20,000
5,000
10,000
$35,000
$21,000
4,000
9,000
34,000
$ 1,000
9,000
Labor
4,000
Fuel
Freight in
Depreciation (factory)
1,000
Taxes (factory)
200
100
40
$15,340
100%
197
Less:
Discount on Purchases
Rent
of
Steam Power
% 500
700
$1,200
$14,140
$5,860
24.3%
Selling Expenses:
Advertising
Salesmen's Salaries
Discount on Sales
$320
1,000
200
$1,520
Administrative Expenses
Salaries of Officers
General Expense
Interest
Bad debts
Rent
(offices)
Net
$600
630
427
20
100
'
$1,777
$3,297
$2,563
Profit
12.3%
$500
1,000
Surplus
The
$1,500
$1,063
possibilities of variation
It
telligible basis.
Net Sales an Important Statistical Base. In the above statement no "returned sales and allowances" are indicated. When
there is such an item it must be deducted from sales to arrive at
net sales. The figure for net sales is very important because it
the best basis from which to figure the percentage of the various
items of cost, expense, etc. If net sales is taken as 100 per cent,
then all following items in the income statement can be figured
is
in the
way
of
198
net sales.
The
net profit
is
Simi-
and cents.
Income Statement Deductions from Assets.
The full significance and bearing of the income statement can be
comprehended only by studying its significant component parts
in their relation to one another and in their bearing upon the
assets and liabilities as presented in the balance sheet.
Thus
there are certain items of expense found in the income statement
which represent deductions from asset values, sloughings-off, so
to say, in the form depreciation and bad debts.
The amount of
the taxes depends upon the valuation of the assets.
Fuel
expense represents the consumption of an asset. The income
statement measures changes in assets and liabiUties during the
are expressed absolutely in dollars
Significance of
period covered.
The
Inventories.
possible,
Again,
liabilities
Thus the
when they
when considered
relative size,
shown with
may
in their
it
normahty or
consid-
and studied.
The Fixed Charges. Among most important classes of
items shown in the income statement are the fixed charges.
with fluctuations in
are included
taxes, rents, interest, and so on.
They represent the low water
mark beneath which the income of the business should not be
the
amount
(or
if
so,
but
of business transacted.
little)
Among them
199
such as
salaries,
it is
unlikely
that the fixed charges can be reduced at all. They must be met.
Hence the necessity of keeping them within reasonable limits.
all
of Profits.
fixed charges
is
correspondingly reduced.
of
way
business
In different
street car
company
is
quite certain
of enjoying a steady
200
Here market
finished pro-
yet
it
may
Need
of
sale of
accompany
all
201
kinds of undertakings.
Some
may
be graded into classes which run all the way from those
without any permanent indebtedness to those in which the
they occur.
Certain readjust-
all
enterprises are
more or
less
and the
like.
CHAPTER XXXI
THE INCOME STATEMENT ILLUSTRATED
Illustrative Statements.
we
shall
reproduce two
Hooper,
Wm.
202
of
203
1916
1915
$14,475,244.09
$13,364,006.89
Per cent
Revenues:
From Transportation
From Transportation
From Transportation
23,229,864.82
8,674,863.13
235,728.89
1,068,662.21
1,086,733.73
1,808.878.97
1.000.923.23
of Passengers
of
of Express
Revenue
Total Revenues
Expenses:
For Maintenance of Way and Structures.
For Maintenance of Equipment
For
For
For
For
tion
$44,786,730.88
$ 4,819.787.28
$ 7,616,683.81
$ 4.662,311.01
$ 6,869,899.60
915,300.54
17.167,742.83
406,418.51
1,054,746.23
39,705.18*
38.08%.
$19,639,925.05
$17,029,784.16
Inc.
15.33
$ 2.517.882.68
7,449.64
$ 2,115,333.84
1,505.40
Inc.
Inc.
19.03
394.86
$17,114,592.73
$14,912,944.92
Inc.
14.76
Securities
Total Income
81.059.91
235.664.85
476,936.50
237,547.58
74.203.99
242.326.17
405.501.06
271.725.34
and
516,071.71
2,899,309.37
2,033,713.19
1,052,261.97
367.244.69
1,536,916.36
1,906,123.16
199,532.80
$ 7,532,565.08
5,003,573.57
$24,647,157.61
$19,916,518.49
755,733.83
5,983,152.26
1,701,967.66
6,156.00
22.439.94*
6,063,815.49
1,616,056.13
6,247.00
1,289,700.00
$ 8,447.009.75
$8,953,378.68
$16,200,148.06
$10,063,139.81
Lcm:
Ten Per Cent. (10% ) Dividends on Stock. $ 4,222,040.00
Ten Per Cent. (10%) Extra Dividend
Payable December 20, 1016
$ 4,222,040.00
Credit itema.
Inc.
16.07
Accounts
Coal Department Earnings
Depletion of Coal Deposits
Sundry Additions and Deductions
Inc.
Inc.
Dividend Income
Balance, Surplus
15.17
3.38
10.87
Q20..'i5fi 07
Dec.
57
14,222,296.73 Inc. 20.71
350.504.82 Inc. 15.95
951.999.79 Inc. 11.97
210.621.30* Dec. 81.15
Income:
ilnc.
.16
15.38
38.26
$27,756,946.72
Total Charges
23.94
5.56
11.32
22.37
$31,940,974.02
Operating Income
for Additional
18,742,617.06 Inc.
8,218,316.43 Inc.
211,766.24 Inc.
873,317.56 Inc.
1.084.979.60 Inc.
1,567.783.33 line.
723,943.77 Inc.
61.92%
Add
8.32
$51,580,899.07
Transportation Expenses
Miscellaneous Operations
General Expenses
Transportation for Investment-Cr...
Total Expenses
Inc.
$ 4,222,040.00
$ 4,222,040.00
$ 8.444.080.00
$ 8,444,080.00
$ 7.756.068.06
$ 2.519.059.81
204
Delaware, Lackawanna & Western had a credit balance of $22,439.94 in its "Hire of Equipment" account, in 1916 this changed
This increased use of rented
to a debit balance of $755,733.83.
equipment is fully explained by the extraordinary increase of
traffic in 1916.
The coal traffic of this company increased 16
per cent, in tonnage while its merchandise traffic increased 26.15
per cent., as fully set forth in the company's annual report.
Under the head of "deductions from income" we note that in
1915 there was charged $1,289,700.00 for "discount on bonds
In the company's report for 1915 it is explained that this
sold."
sum was charged against income to cover the discount on the 3}^
per cent bond issue of a subsidiary, the Morris & Essex Railroad
Company, the proceeds from which were employed to pay off
certain outstanding bonds of that subsidiary.
The reason the
company chose to charge off the entire amount of the discount on
its bonds in a single year is explained below.
The classification of revenue and of operating expenses required by the Interstate Commerce Commission should be noted.
The account, "Transportation for Investment Cr.," requires
explanation. A railroad company is constantly engaged in
transporting workmen and materials from point to point along
its lines for the purpose of making improvements or engaging in
new construction work. The cost of such transportation is not
an expense, but an investment. Since, however, it cannot be
separated from the ordinary operating expenses when incurred,
it is deducted from them in the profit and loss statement and of
course is charged in the company's ledger to the appropriate
property investment accounts.
The Operating Ratios. Note that the ratio of operating expenses to revenues from operation is 61.92 per cent. This ratio
is of considerable importance as an aid in the interpretation of
the income accounts of railroad companies as well as of other
enterprises.
It is familiarly
known
It
natures
205
fully standardized.
Other Income,
etc.
Frequently
an income
is
derived from
come
is
railroad
Such
portation
is
other income.
in-
that a
trans-
other, or "additional,"
income amounted to
The
pro-
The usual procedure in such cases is to prorate the discount over the life of the bonds, charging off the proper amount
each year. Under the rules of the Interstate Commerce Commission, however, a railroad company has the option of charging off,
at any time, any remaining portion of such discount, providing
there is sufficient surplus to permit it. The latter policy appears
to have been adopted by the Delaware, Lackawanna & Western.
A noticeable feature of the income statement of this company
is the small interest charge on the funded debt.
In 1916 the
funded debt of the company was $320,000; its capital stock was
$42,277,000. The funded debt amounted to less than 1 per cent
bonds.
206
in railroad
more
-|-
1914
Increase
Decrease
Third Quarter
and Mortgages
-$
$15,082,369.36
30.536,467.71
41.050.432.47
53.580.796.79
$20,450,988.60
22,956.414.32
24,792,603.80
13,546.511.14
+
+
+
$140,250,066.33
$81,746,517.86
-h $58.503,548.
9,854,054.69
10.082.902.69
$130,396,011.64
$71,663,615.17
24,408.576.60
17.044,183.32
1.553.587.99
1,903,041.68
6,465,884.26
6,195.982.41
$ 97,967,962.79
$46,520,407.76
21,928,633.74
22.239.086.53
310.452.79
107,210.28
87.331.46
19,878.82
864,100.00
822.200.00
41,900.00
$ 75,068,018.77
$23,371,789.77
765,813.94
124.978.40
$75,833,832.71
$23,496,768.17
25,219,677.00
25,219,677.00
6,353,781.25
15,249,075.00
5,368,619.24
7,580,053.39
16,257,828.67
40,034,285.65
47
Bonds
of the Subsidiary
Balance of Earnings
Charges and Allowances for
Depreciation applied as follows,
228,848.00
+$58,732,396.47
Less,
vit.:
To
7,364,393.28
To
Net Income
in the year
349,453.69
269.901.85
+ $51,447,555.03
Deduct:
Interest on U. S. Steel Corpora-
On
U.
Corporation
8. Steel
Bonds
Balance
and
credits,
+ $51,696,229.00
sundry charges
including adjustments
Dividends on U.
of
S. Steel
640,835.54
+ $52,337,064.54
Corpora-
Preferred. 7
Common,
3
%
1915-l>i%.
1914-
%
Surplus Net Income for the year
Deficit.
$44,260,374.46 $16,971,983.83'
8,895.293.75
+ $61,232,358.29
207
depreciation
made
in
1915, on the other hand, the profits were three times as great
as in 1914,
making
common
These
tions in
desirable.
When
and varia-
enterprises are
CHAPTER XXXII
CONSTRUCTION AND INTERPRETATION OF THE
BALANCE SHEET
The balance
They
of information that
Arrangement
of the
Balance Sheet.
when a comparison
is
made with
is
to
show as nearly as
Plant
Machinery
Merchandise
Cash
LiabUities
Capital Stock
$10,000
4,000
3,000
Accounts Payable
Surplus
S14,000
3,000
1,000
1,000
$18,000
$1 8,000
208
209
Plant
$10,000
4,000
3,000
Machinery
Merchandise
Cash
1,000
$18,000
Liabilities
$14,000
3,000
1,000
Capital Stock
Accounts Payable
Surplus.
$ 18,000
Balance Sheet of the A. B. Co.
Assets
Liabilities
Capital Stock
Accounts Payable
$14,000
3,000
Surplus
1,000
$10,000
Plant
Machinery
Merchandise
Cash
4,000
3,000
1.000
$18,000
$18,000
problems.
dependent.
Classification of Assets.
of the assets, liabilities
is
largely
and
as in case of land.
expenditure.
is
a good one.
210
various
franchises,
They should
be distinguished carefully from temporary investments made
for the purpose of turning idle funds to some profit.
Investment
of reserves would include all funds set aside for specified purposes,
such as bond sinking funds, funds intended for future extensions,
and so on.
Working and Current Assets. Next, a suitable classification
must be made of the assets of a less permanent character, such as
cash, merchandise, accounts and notes and acceptances receivable, and so on.
Accountants sometimes make a twofold classification of this division, namely, working and current, although
the division hne between these is not always distinct. As a
consequence the word "current" has been employed by some to
include working assets.
Generally, however, a distinction ought
Unlike cash or
to be made between working and current assets.
211
payment
of debts.
ent,
and
in
differ-
made
arbitrarily but
on the basis of
Deferred Charges.
and
current,
With
it is still
variously termed
working
more or
deferred
less
common
charges,
items.
deferred
These are
assets,
deferred
What
is
consumed or
used up."
that
Dickinson'
exists
of Hatfield
'
Elements of Accounting,
'
Modern Accounting,
p. 165.
p. 113.
A discrepancy
212
hand and
of Dickinson
on the other.
From
the
first
two quota-
Sheet" and because they are "not yet consumed or used up."
In the last quotation cited we are told that they "represent no
value."
The only
in a different sense
Klein and
Dickinson
is
to
employed
"deferred charges" by
is
Hatfield.
interest,
(p. 34)
includes
among working
assets "insurance,
tion expenses,
Thus
any kind
it
Why
assets?
as indirect and
and
loss as
expense.
find its
way
to profit
in
advance to
is
apparent.
surplus.
The
by the market
213
may not correspond to their interests measured in terms of the book accounts for capital stock and surplus.
Capital stock and surplus are considered separately for technical
and legal reasons although they represent one thing the equity
of the stockholders.
Liability
stock at par
company.
The
Crandall et
tee, vs. Ro.ss,
al.,
Al.so,
Bush, Trus-
68 Conn. 29.
"No
ance with the law allowing the reduction of stock, or upon the dissolution
If such payment or distribution renders a corporation in-solvent, the directors so voting .shall be jointly and severally
liable, to the amount so paid or distributed, to any creditors existing at
the date of such vote who shall obtain judgment against such corporation
on which execution shall be returned unsatisfied."
of the corporation.
214
is
invested in
by the quantity
of that asset,
is
may
continue indefinitely in
The
question, then,
is,
There
is little
has the prospect of continuous existence. It may not be advisable to build as well or to continue making repairs and replacements beyond a point in time which will be determined by the
prospective life of the wasting assets. As the time of exhaustion
of a mineral deposit approaches it would be inadvisable to continue
making any more repairs to the buildings and machinery than
much
is
less.
or average depreciation.
215
als will
form
of
the rate that the value of the mineral in situ decreases from
exploitation.
This
is
when
made
would
appear to be a matter of expediency so long as its effect is not
obscured by incorrect accounting. The objection to the retento be followed respecting a further retention of capital
of
rather unproductive.
lished to
As cash accumulates
compensate the
loss resulting
assets
it
sinking funds.
'
216
must be kept
in tact as a trust
is
is
essentially different.
business
when
this
is
raw materials
continuous he has
His depreciation
Not
217
will
may
output, as so
much
(6)
distribution of capital
when
it
CHAPTER XXXIII
CONSTRUCTION AND INTERPRETATION OF THE
BALANCE SKEET (Continued)
Balance Sheet Illustrations.
Any
company's
of the
assets.
that the following balance sheet indicates accurately the condition of the Superior
it
begins busi-
ness:
Wasting Assets
Capital Stock
$100,000
20,000
Plant
Machinery
Cash
$100,000
35,000
10,000
5,00
$135,000
$135,000
of ten years
it is
estimated that
the wasting assets are one-half exhausted, and that a fund has
been set aside to cover this exhaustion, that reserves have been
up to cover depreciation of plant and machinery, and that
other accounts undergo no change. The balance sheet then
appears thus:
set
Wasting Assets
Less Reserve for Depletion
Capital Stock
$100,000
50,000 Bonds (20 years).
35,000
$100,000
50,000
Plant
$20,000
Less Reserve for Depreciation
Machinery
8,000
12,000
$10,000
5,000
5,000
2 IS
219
Funds
For wasting Assets
For Plant
For Machinery
Cash
$50,000
8,000
5,000
63,000
5,000
$135,000
$135,000
Suitable reservat'ons
bonds.
Must
amount
of the outstanding
Would not
' The word "depletion" is very properly employed to distinguish the exhaustion of wasting assets from the depreciation of plant, etc.
220
Wasting Assets
Capital Stock.
$100,000
50,000
Less Depletion
Bonds (20
..
yrs.)
$100,000
35,000
$50,000
Plant
Less Reserve for De-
$20,000
8,000
12,000
preciation
Machinery..
Less Reserve for Depre-
$10,000
ciation
5,000
5,000
Funds
For Plant
For Machinery
For Bonds
$8,000
5,000
20,000
33,000
Cash
5,000
Deficit (due to
payment
of
30,000
$135,000
$135,000
This balance sheet shows the results of the payment of dividends from capital. No provision has been made for the depletion of wasting assets.
The only item which tends to compensate
for the decrease in value of wasting assets, amounting to $50,000,
is the bond sinking fund of $20,000, which has been reserved out
of income.
This gives adequate protection to the bondholders
providing this money is placed in the care of an independent
To
trustee.
equity of
its capital
amount
mean
last years of
it
in investelse
very
unproductive.
Profits Distributable as Dividends.
engaged
make
Aside
from enterprises
full
provision for
all losses
is
this.
the rule to
from depreciation.
It is generally
221
acknowledged
that bona fide profits resulting from ordinary operations are distributable as dividends.
Owing to the complex nature of
business this matter frequently becomes complicated, as the
profits
deficit or
may
it
be distributed as dividends?
is
if
Should such
so, are such
community
increments of wealth
be con-
dends?
3. Shares of stock are sometimes sold at a premium.
If a
corporation disposes of stock at a premium, is that premium to
be considered as profit distributable as dividends or is it a part
of capital
first
proposition, there
is
a unit to be considered without reference to the ones preceding it. To carry such
a plan to its logical conclusion would be equivalent to a denial of
the integrity of the invested capital and make uncertain its
amount and stability. If each year in which a deficit occurs is
permitted to make inroads into capital, and if nothing is reserved
during fat years to make up these deficits, then with every year
in which there occurs a deficit there will result a reduction of
the investment. An accumulation of such deficits would ultimately lead to insolvency.
little
is
manner
in
222
all
single year.'
control of the
of profits,
it is
value
is
profit
management
might retain
it
Premium on
Capital Stock.
of the shares
is
Proposition
premium the
When
three.
shares
known
as the
on stock as a dividend.
On
New York
court
this view.
The Equitable
company
New
"It
is
said,
as such.
its capital
sum was
That
is
its
stock at $175
paid in as capital
not
my
interpre-
The
became
amount
capital,
'
on
of
and
Practice,
2nd
N. E. Rep.
its liability
issued for
it.
223
amount of accumulated profits or surplus which it was supposed would be apportionable to each share of new stock after payment
and issue as aforesaid.
When paid in this premium became part
of such accumulation of profits and surplus and distributable as such.
." Also:
It was credited to profit and loss and not to capital.
sented the
as between
new and
premium
is
solvency.
pay the
the
company
sees
fit.
To
balance
$100,000
Stock
50,000
Bonds
Surplus
$150,000
$1 50,000
may or may
$100,000
25,000
25 000
If it is distributed,
224
that $100,000 of
new stock
is
sold at 125.
is
is
Commerce
Commission, which has ruled that, "In case the accounting company is permitted and elects to distribute all or any part of the net
premium on its capital stock to its stockholders, the amount thus
premium account."^
Conclusion.
work
construction.
The
by
its
it
That
Although very
much remains to be done in the way of systematization in balance sheet construction, much progress has been made toward
standardization in form and terminology.
BIBLIOGRAPHY
Part V.
Bennett, R.
J.
Financial Statements
Corporation Accounting.
New
York, 1916.
Chapter
XXIV.
Cole, W. M. Problems in the Principles of Accounting. Cambridge, 1915.
Oilman, S. Principles of Accounting. Chicago, 1916. Chapter IV.
Greendlinger, L. Accountancy Problems, Vols. I and II. New York,
1911.
L. Financial and Business Statements. New York, 1917.
Hatfield, H. R. Modern Accounting. New York, 1909. Chapter III.
Klein, J. J. Elements of Accounting. New York, 1913. Chapter IX.
Saliers, E. a. Financial Statements Made Plain.
New York, 1917.
Greendlinger,
' Classification
of Income, Profit and Loss and General Balance Sheet
Accounts for Steam Roads, effective July 1, 1914, p. 39. See also Uniform
System of Accounts for Electric Railways, effective July 1, 1914, p. 75, and
Uniform System of Accounts for Express Companies, effective July 1, 1914,
Apparently, however, the Interstate Commerce Commission favors
p. 73.
the retention of the premium on stock sold until offset (1) by discounts on
sales of the
same
by
credits to profit
and
loss
upon
PART VI
SPECIAL APPLICATIONS OF PRINCIPLES
CHAPTER XXXIV
DEPARTMENT ACCOUNTING
Accounts Locate Responsibility.
an accounting system
responsibility.
This
is
management to locate
we have a
charge of persons upon whom
to enable the
is difficult
or impossible unless
on a departmental basis. The size and character of the departments depend upon the nature of the business. In manufacturing, departments are established for the performance of a certain
process or the manufacture of certain classes of commodities.
In merchandising, departments are established to deal in certain
classes of goods, as illustrated by the ordinary department store.
Purpose of Departments. As soon as a business is departmentalized it is no longer a single activity but a group of activities
united by a single ownership and control. The manager of such
an enterprise must be able not only to show what results are being
accomplished by the concern as a whole; he must also be able to
distinguish and compare the results accomplished by the different
departments. Each department incurs various expenses, consumes supplies, and must be charged with a reasonable proportion of general expenses or overhead, such as result from salaries
paid to general officers, taxes, depreciation, and so on. If a concern is properly organized, and if its departments are definitely
laid out and responsibility located, an adequate accounting system can be set up. If, on the other hand, the organization is
loose, departments without definite functions, and responsibility
indefinite, it is impossible to install a system of accounts that will
225
226
When
it will
is
fully
grasped
system for a non-departmentalized concern and one for a departmentalized concern lies in the subdivision of the accounts.
Thus if a merchant who has kept a general merchandise establishment wishes to organize a department store he can do so by
classifying his merchandise into groups, making each group the
For example, Department A might be
basis of a department.
the dry goods department, Department B the groceries department. Department C the hardware department, and Department D the notions department, and so on. Each department
may be compared to a small single-line store. The number of
departments will vary considerably with the conditions and the
desires of the
management
in different instances.
The depart-
ments mentioned above might be further subdivided. Department A-1 might be men's clothing, Department A-2 women's
clothing. Department A-3 children's clothing, and so on ad
infinitum.
How
Accounts are Kept. The systematization and coordinathe various departments are accomplished by the use of
columnar Journals and controlling accounts with subordinate
Ledgers. Such a system must be both accurate and practicable.
A single Journal with two columns, one for charges and one for
credits, might be accurate but it would be impracticable, for a
department store. Likewise a single Ledger might be accurate
but the introduction of hundreds of personal accounts would
make it impracticable. Accounts must not only be correct in
principle, they must also be adaptable to specific requirements.
Such systems cannot be purchased ready made. They must be
contrived to fit the peculiar conditions that characterize an enterprise just as an architect draws up the plans for a building only
after he consults both his customer's needs and the physical surroundings of the location. He then applies the general princition
ctf
All
Each department
is
considered as a
all
may
So
each
department, while those expenses which cannot be charged di-
be ascertained.
must be kept
for
DEPARTMENT ACCOUNTING
227
Insurance
Light
Heat
Advertising
Rent
228
for
directly to departments,
and so
on.
is
expenses.
The
following
lowed
Name
of
Expense
Basis of Distribution
Heat
Value of property
Value of propertyCandle power required
Cubic feet of space
Sales
Insurance
Interest on stock
(if
used)
Light
Rent
Advertising
General Administrative
Sales
Distribution Illustrated.
final.
The
method
best
to circumstances.
To
These
to follow
illustrate the
procedure necessary to
make
on the basis
able as follows.
Department A
Department B
Department C
Department D
J^
3"^
3^
}4
month
is
$50.
This might be
Clearing Account
$50 00
.
To Vouchers Payable
When
$50. 00
the distribution
is
is
made
Expense Department A
Expense Department B
Expense Department C
Expense Department D
To Light Expense Clearing Account
Light
Light
Light
Light
See Moxey, E.
P., Jr.
closed, as follows:
and others:
$25 .00
12. 50
6 25
6 25
.
$50 00
.
DEPARTMENT ACCOUNTING
229
pense
all
To Vouchers Payable
Clearing Account
$50.00 By Light
By Light
By Light
By Light
Expense Dept.
Expense Dept.
.$25.00
12 50
Expense Dept. C.
6.25
Expense Dept. D... 6.25
A...
B..
$50.00
Results Secured.
When
all
$50.00
and
them a
it is
possible to set
By
profit
and
loss
up
combining
is
also
In this way
partments as compared with one another and with the whole
establishment may be learned. Departmentalization may be
carried as far as desirable; but ordinarily a practical limit will be
secured.
When transfers
of
merchan-
Purchases Department A
To Purcha.ses Department
$310 20
'
$310.20
to
Department A.
"at cost."
To
is
This
is
not the
best
necessary to
Instead
department surrendering
It
then becomes
'
230
an
important statistical figure.
Manufacturing. The same principles apply to departmental
accounting in manufacturing as in trading. A department of a
factory is charged with raw material consumed and also with its
proper proportion of indirect expense. These costs are charged
to the departmental goods in process (or manufacturing) controlling account and at the same time are distributed over the
various order numbers in the departmental cost ledger. Separate finished goods Ledgers may also be kept for the different
departments. Each department thus becomes a unit, a factory within a factory and its profits can be determined
order to secure the correct percentage of profits on sales
independently.
Whether or not a factory can be thus completely departmentalized depends upon the nature of its operations. If its
output is such that it requires a continuous operation, passing
from stage to
stage,
is
CHAPTER XXXV
DEPARTMENT ACCOUNTINGPRACTICE
Problem
1.
is
engaged
in selling
The
1.
Men's clothing
2.
Women's
3.
Children's clothing
4.
House Furnishings
clothing
paid, consists of
two
floors
among
is
is
7,500
clothing;
for children's
and D,
cloth-
respectively,
1.
Sales
2.
Purchases
3.
4.
Returned Sales
Returned Purchases
5.
Wages
6.
7.
The
Selling
clearing accounts:
Account
Basis of Distribution
Insurance
Light
Heat
Salaries
General
Value of property
Officers
Rent
Floor space
Advertifing
Net Sales
Net Sales
Net Sales
General Administrative
Bad Debts
231
232
Required
(a)
(6)
Under
(o)
above
be installed.
Solution, Problem
it is
1.
General Journal
Sales Journal
Voucher Register
The
rulings
and headings
of these
DEPARTMENT ACCOUNTINGPRACTICE
233
1
1
pa
1
<
f^
a
o
1a
JS
Oi
<
aM
JS
So
V
Pi
(^
^
in
re-
ReReceiv-
ft*
sales
General
the
accounts
Accounts
the
Accounts
returned
credit
8
in
sales
total
and
credit
debit
CO
accounts
for
sales
month
resFtective
Ledger.
month
Account
total sales
of
of
General
spective
At
<
At
Ledger.
able
debit
end
end for
ceivable
and the
234
1
"(5
1
||
a
Q
(D
s
3
O
>
d
Ji
o
3
>
6
o
1
s
9
a
t^
a
o
JS
1
'a
a>
<3
DEPARTMENT ACCOUNTINGPRACTICE
u
i>
a
e
C8
ft
(2
^
o
s
a
2
a
.
t>
>
a
3
o
S
1!
9
c
oa
SO
3d
oopg
CQ
.
a
3
o
V
2d
a,
4)
>
:a
o
S
2
n
2
V
g
-3
s
a
<
<
Oh
hi
bCI
a
.2
M
V
General Expenses
>
Oi
-;
0)
J1
General Expenses
u
9
O
>
>
a
ti
General Expenses
g
o
_
3
c
S
fl
v
at
l<
235
236
as at
December
Company,
31, 1919
$ 40,000
5,400
Cash
$ 12,100
Petty Cash
Insurance Expired on Mdse-Glearing a/c
Insurance Prepaid
Light Expense-Clearing a/c
Expense-Clearing a/c
Salaries General Officers-Clearing a/c
Rent Expense-Clearing a/c
Advertising Expense-Clearing a/c
General Administrative Expense Clearing a/c
Bad Debts Expense-Clearing a/c
Sales: Dept. A
Dept. B
Dept. C
Dept. D. ,
Purchases: Dept. A
Dept. B
Dept. C
Dept. D
Returned Sales: Dept. A
Dept. B
Dept. C
Dept.
Returned Purchases: Dept. A
Dept. B
Dept. C
Dept. D
Wages: Dept. A
Dept. B
Dept. C
Dept.
General Departmental Expense: Dept. A
200
600
240
300
2,300
11,500
6,000
700
2,000
400
20,500
18,000
7,000
57,000
'.
'.
Dept.
Dept.
Dept.
Selling Expenses: Dept.
Dept.
Dept.
Dept.
Accounts Receivable
Accounts Payable
Reserve for Bad Debts
A
B
C
B
C
17,000
14,000
4,000
35,000
640
200
100
1,200
200
500
40
100
1,500
1,200
500
2,000
1,400
700
300
2,000
800
400
100
1,000
15,000
11,600
500
DEPARTMENT ACCOUNTINGPRACTICE
237
Dept. A
Dept. B
Dept. C
Dept. D
Furniture and Fixtures
4,000
3,000
1,200
17,300
10,000
$160,880
$160,880
Dept.
Dept.
Dept.
Dept.
The
A
B
C
$ 5,000
16,000
3,100
500
Insurance
that
is,
Dept.
Dept.
Dept.
Dept.
(b)
The
is
A.
B.
(
(
as follows:
The
A
B
C
relative heat
Dept.
Dept.
Dept.
Dept.
of
The amount
is
of total
of total
Ks
of total
of total
H
%
of total
K2
of total
as follows:
A
B
C
of total
^^ of total
A
B
C
$19,860 (21.98%)
17,800 (19.70%)
6,900 ( 7.64%)
45,800 (50.68 %)
D
Officers,
consumption
General
ministrative and
y^
The amounts
Salaries
relative candle
Dept.
Dept.
Dept.
Dept.
(d)
C.
Dept.
Dept.
Dept.
Dept.
(c)
is
old plus
of net sales.
departments
follows:
Dept.
Dept.
Dept.
Dept.
Ad-
A
B
C
7,500 sq.
ft.
(12.50%,)
7,500 sq.
ft.
(12.50
ft. (
5,000 sq.
40,000 sq.
Total
60,000 sq.
ft.
ft.
%)
8.33%)
(66.67 %,)
is
as
238
Rent
is
The next
and
profit
and
loss,
as follows:
Trading
Trading
Trading
Trading
To
$107.76
73 08
20.34
398 82
.
Clearing a/c.
$600.00
distribution being
in the
H
%
To
$300 00
.
Account Dept. A. H
Account Dept. B. H
Account Dept. C. K2
Account Dept. D. %i
To Heat ExpenseClearing
Trading
Trading
Trading
Trading
To
287 50
287 50
191 67
1,533.33
.
$2,300 00
a/c
To
750.00
750.00
499.80
4,000.20
$6,000.00
on basis of
voted to departments.
Trading Account Dept. A.
Trading Account Dept. B
Trading Account Dept. C
Trading Account Dept. D
To Advertising Expense
floor
space de-
$153.86
137.90
53 48
354.76
.
Clearing a/c
$700 00
.
DEPARTMENT ACCOUNTINGPRACTICE
To
on basis
of net sales of
the departments.
Administrative Account
Administrative Account
Dept. A
Dept. B
Administrative Account Dept. C
Administrative Account Dept. D
To
To
239
$2,527.70
2,265. 50
878. 60
5,828.20
$11,500.00
Administrative Expense
Clearing
439.60
394.00
152.80
1,013.60
$2,000.00
a/c
To Bad DebtsClearing
To
$400 00
a/c
on basis of net
This closes
all
made
for the
Next the
departmental accounts.
Account, Dept. A
Account, Dept. B
Account, Dept. C
Account, Dept. D
Dept. A. Inventory
Dept. B. Inventory
Dept. C. Inventory
Dept. D. Inventory
Trading
Trading
Trading
Trading
To
To
closing entries
must be
These follow:
$ 4,000.00
3,000.00
1,200.00
17,300.00
$ 4,000.00
3,000.00
1,200.00
17,300.00
accounts of
' Note
that inventories, purchases, sales, etc., are carried direct to the
trading accounts. They are sometimes taken to a merchandise account,
but it is thought that the above procedure will here facilitate the construc-
tion
and understanding
of the trading
and
profit
and
loss statement.
240
Dept.
Dept.
Dept.
Dept.
A. Inventory
$ 5,000.00
B. Inventory
3,100.00
C. Inventory
500.00
D. Inventory
To Trading Account
Trading Account
Trading Account
Trading Account
16,000.00
Dept.
Dept.
Dept.
Dept.
A
B
$ 5,000.00
3,100.00
16,000.00
500.00
Sales Dept. A
Sales Dept. B
SalesDept. C
Sales Dept. D
$20,500.00
18,000.00
7,000.00
57,000.00
$20,500.00
18,000.00
7,000.00
57,000.00
To carry sales to the trading accounts of the departments, closing the department sales accounts.
Trading Account Dept. A
$17,000.00
Trading Account Dept. B
14,000.00
Trading Account Dept. C
4,000.00
Trading Account Dept.
35,000.00
To Purchases Dept. A
$17,000.00
14,000 00
Purchases Dept. B
PurchasesDept. C
4,000 00
Purchases Dept.
35,000.00
To
To
640.00
200.00
100.00
1,200.00
A
B
C
1,200.00
640.00
200.00
100.00
$200.00
500.00
40.00
100.00
DEPARTMENT ACCOUNTINGPRACTICE
241
To Trading AccountDept. A
Trading Account Dept. B
Trading Account Dept. C
Trading Account Dept. D
$200 00
500 00
40.00
100.00
.
To
Trading
Trading
Trading
Trading
AccountDept. A
Account Dept. B
Account Dept. C
Account Dept. D
$1,500.00
1,200.00
500.00
2,000.00
To Wages Dept. A
$1,500.00
1,200.00
Wages Dept. B
Wages Dept. C
WagesDept. D
500.00
2,000.00
$1,400.00
700. 00
2,000 00
General Dept.
Exp. Dept.
300.00
.
Account Dept. A
Account Dept. B
Account Dept. C
Account Dept. D
To Selling Expense Dept. A
Selling Expense Dept. B
Selling Expense Dept. C
Selling Expense Dept. D
Trading
Trading
Trading
Trading
To
800.00
400.00
100.00
1,000.00
16
of the
1,000.00
800 00
400.00
100.00
departments follows:
242
for year
Trading Section
Inventory, Dec. 31. 1918
Purchases
S 4.000.00
17,000.00
$20,500.00
Sales
Less Returned
640.00
Sales
$21,000.00
Leas
Inventory,
Dec.
Net Sales
1919
.5.000.00
Bftl
ance, Gross
Less
$19,860.00
31,
...
989 12
.
$16,000.00
200. 00
Returned Purchases
$20,849.12
$20,849.12
Administration Section
Balance, Gross Trading Loss.
Salaries, General Officers
General Administrative
pense
Bad Debts
$ 989.12
2,527.70
$4,044.34
Ex439.60
87.92
$4,044.34
$4,044.34
DEPARTMENT ACCOUNTINGPRACTICE
Income Statement, Department B,
for year
243
ending
17,000.00
Less Inventory Dec.
$18,000.00
200.00
Sales
Net
..
Sales.
$17,800.00
31,
'19
3,100.00
13,900.00
Less Returned
Pur-
500.00
chases
Wages
1,200.00
Expense
Insurance on Mdse
Light Expense
Heat Expense
Rent Expense
Advertising Expense
Balance, Gross Trading
Selling
700.00
400 00
73.08
33 33
287 50
750 00
137.90
.
818.19
Profit
$17,800 00
$17,800.00
Administration Section
Salaries,
Balance,
Gross Trading
Profit
General
Expense
Bad Debts
Administrative
394.00
78.80
$2,738.30
$818.19
1,920. 11
$2,738.30
244
Trading Section
Inventory
1918
Purchases
Dec.
31,
$1,200.00
4,000.00
Sales
$7,000.00
Less Returned Sales.
100.00
$5,200 00
Net Sales
Less Inventory
$6,900 00
.
Dec.
500 00
31,1919
$4,700.00
Returned
Less
chases
Pur-
40 00
.
$4,660.00
Wages
500.00
General Departmen-
Expense
Expense
Insurance on Mdse
Light Expense
Heat Expense
Rent Expense
Advertising Expense
300 00
100.00
20 34
16. 67
191 67
499.80
53.48
tal
Selling
558.04
ing Profit
$6, 900.0
$6,900.00
Administration Section
Salaries,
General Officers
$878.60
Balance,
Gross Trading
$ 558.04
ing Profit
General
Administrative
Expense
152. 80
Bad Debts
30.66
$1,061.96
ried
to
Section
Distribution
503.92
$1,061.96
...
DEPARTMENT ACCOUNTINGPRACTICE
Income Statement, Department D,
245
Trading Section
Dec.
Inventory,
31, 1918
Purchases
Less
1,200.00
$55,800.00
Inventory
15,000.00
36,300.00
Less
Returned
Purchases
Cost of Goods sold
100 00
(turnover)
$36,200.00
2,000.00
Wages
General
Departmental Expense.
Selling Expense..
Insurance Mdse.
Light Expense
2,000.00
1,000.00
398.82
200.00
Heat Expense
Rent Expense
Advertising
1,533.33
4,000.20
Ex-
pense
Balance,
Gross
Trading Profit.
354.76
8,112.89
$55,800.00
$55,800.00
Administration Section
Salaries,
General
Officers.. ..$5828.
20
Balance,
Profit
General
Gross
Trading
$8,112.89
Administrative
Expense
1,013.60
Bad Debts
202.72
1,068.37
$8,112.89
$8,112.89
246
$4,044 34
.
Net
Profit,
House
Fur-
nishings
1,920. 11
503.92
$1,068.37
Balance,
Net Ixiss all
Depts., carried to Surplus
$6,468.37
5,400.00
$6,468.37
Liabilities
Cash
$12,100.00
and Capital
Petty Cash
Insurance Prepaid
Accounts Receivable. ..
Inventories,
Dec. 31,
1919
.
200.00
240.00
Accounts Payable
Reserve for Bad Debts.
$40,000.00
11,640.00
500.00
15,000.00
24,000.00
$52,140.00
$52,140.00
CHAPTER XXXVI
DEPARTMENT ACCOUNTING PRACTICE
(Continued)
The
A. Toys
Groceries
House Furnishings
D. Clothing, Women's and Children's
E. Shoes
B.
C.
is
The
feet.
is
E the entire third floor. The basement ceiHng is 8 feet above the
floor; all other ceilings are 9 feet high.
The
1.
Sales
2.
Purchases
3.
4.
Returned Sales
Returned Purchases
5.
Wages
7.
Advertising
8.
basis indicated
248
Account
Basis of Distribution
Insurance Building
Insurance Mdse.
Repairs on Building.
Depreciation of Building
Taxes on Building
Light
Floor space
Value of property
Floor space
Floor space
Floor space
Heat
Net Sales
Net Sales
Net Sales
General Administrative
Bad Debts
Following
is
the
trial
Company
as
at Dec. 31, 1919 (student will insert amounts in the two vacant
places)
$ 30,000 00
.
Cash
Surplus
Petty Cash
Insurance Expired in mdsc-clearing a/c
Insurance Prepaid on mdse
Insurance Expired on Building-clearing a/c.
Insurance Prepaid on Building
8,700.00
$
Taxes on Building
clearing a/c
clearing a/c
00
540 00
500.00
1,740.
500.00
400.00
clearing a/c
General Administrative Expense clearing a/c.
Bad Debts Expense clearing a/c
Reserve for Bad Debts
Space Rented
Sales: Dept. A
Dept. B
Dept. C
Dept.
Dept. E
Purchases: Dept. A
Dept. B
Dept. C
Dept. D
Dept. E
1,100.00
1,000.00
24,000.00
Building
Light Expense
Heat Expense
300.00
780.00
500 00
8,000 00
.
1,200.00
300 00
.
300 00
1,800.00
5,000.00
23,000.00
49,000.00
45,000.00
41,000.00
.
3,000.00
17,000.00
35,000.00
36,000.00
34,000.00
DEPARTMENT ACCOUNTINGPRACTICE
Returned Sales: Dept.
249
40.00
350.00
890.00
500.00
200.00
Dept. B
Dept. C
Dept.
Dept. E
Returned Purchases: Dept. A
Dept. B
Dept. G
Dept.
Dept. E
Wages: Dept. A
Dept. B
Dept. C
Dept. D
Dept. E
General Departmental Expense:
500. 00
1,100.00
600.00
Advertising: Dept.
Dept.
Dept.
Dept.
Dept.
2,000.00
700.00
720.00
1,600.00
2,400.00
2,400.00
2,000.00
Dept.
Dept.
Dept.
Dept.
Dept.
A
B
C
D
E
A
B
C
300.00
500.00
800.00
700.00
650.00
100.00
300.00
1,200.00
800 00
300.00
127.00
302.00
808.00
700.00
560.00
17,000 00
.
Dept.
Dept.
Dept.
Dept.
Accounts Receivable
Accounts Payable
Furniture and Fixtures
A
B
D
E
9,000 00
.
13,000 00
.
$218,200.00
$218,200. 00
a/c.
has
been made.
^50
The
ratios of candle
A. 8
Dcpt.
Dept.
Dept.
Dept.
Dept.
Space
B. 12
C. 12
D. 15
E. 15
Rented 3
This balance
will
show net
profit or loss
from
this source.
Required
(a)
To
this business.
(6)
To
set
distribution statement,
Under
(a)
above
it is
CHAPTER XXXVII
MANUFACTURING ACCOUNTING
General Principles.
Manufacturing
accounting consists in
In Chapter
XVI
The work
and
illustrated.
accounting principles to given conditions. In so far as accounting principles are concerned cost accounting does not differ from
mercantile accounting. It consists in their application to different conditions. Were the general principles any different from
those that govern other accounting, cost keeping would be a
distinct science instead of a
branch of accounting.
is
not strongly
of cost account-
ing.
in the following
journal entry:
Purchases
$100.00
To Cash
To record "cost" of goods bought.
$100.00
When
in the
same form
in
which they
is
a simple
goods purchased
less any discounts secured through prompt payment, plus the
cost of placing them "on the shelves" ready for sale.
The
Purchases Journal or Voucher Register shows the bare cost of
the goods while the additional information required is found in
task.
252
costs
1.
Raw
2.
Expense
"Raw
Material
of
Materials"
'
-inner
Manufacture
is
raw material
to one process
is
It is
What
is
bit of material
screws,
of furniture.
Paint
is
manu-
Analysis of Cost.
The
raw
materials.
manufactured
1.
Raw
2.
Expense
article
we have, then
Materials
a.
Manufacture
Labor
b.
Indirect
of
MANUFACTURING ACCOUNTING
253
for this
secured.
is
They
rise to
work
of
of,
any
general
manufacturing could
Among
not be executed.
Nevertheless
The proper
basis for
its due
making
The
factured, from
department.
is
to furnish
254
it
an entry in the
Purchases Journal or Voucher Register. The form of either the
Purchases Journal or Voucher Register will vary with conditions.
Columns should be provided for the different departments. In
and quantity
of
for the
amount
of the purchase.
If
a Purchases Journal
is
made
to
two sub-
Materials Ledger
Raw
may
minimum
output.
MANUFACTURING ACCOUNTING
255
it is
by a responsible
work
is
started
official
to plant.
factory, or of the
begin work.
The
stores requisition
may
itself
be used as a posting
medium
the principle
is the same.
Accounting Procedure, Labor, Materials, Indirect. From the
Materials to Factory Journal postings are made to the credit
side of the various raw materials accounts in the Raw Materials
Ledger and to the debit of the proper order number account in
the Cost Ledger.
The order number accounts in the Cost Ledger
are charged with the various elements of cost raw materials,
256
labor,
as they accrue
and indirect
The
or as soon thereafter as
is
and
total
make
numbers with
indirect.
An
it is
is required.
For this purpose each workman is provided
with a time card on which he enters the time spent on one or
more orders.^ The workman's name and number are entered
orders
upon the
wage rate.
work performed
description of the
Space
is
as will facilitate
numbers on account
of productive labor.
When assorted
accord-
Manufacturing
To
Payroll
or
if
is
used:
Manufacturing
Payroll Vouchers Payable
To
1916,
method
of distributing indirect.
MANUFACTURING ACCOUNTING
257
and use
heating, lighting,
and
janitor
and watchman's
service.
In case
of rented buildings the rent charge takes the place of all or a part
of the above.
The amount
of each of the
above items
is
deter-
handled as
and
loss.
Into this list falls the income tax. But property taxes
should be prorated over the various component parts of plant in
a way which will permit their being properly charged to plant.
Some
indirect.'
Since,
however,
it
it is
it
as a cost of
p. 529.
In
dis-
258
expense of administration,
is
cost of manufacture or
not?
is it
We shall recur
is it
to this problem
Bases
methods
distributing
of
indirect
2.
When
Time
(6)
Cost
Raw
may now
Several
consider
bases
of
Direct Labor
(a)
We
expense.
3.
4.
Materials Cost
is
Prime Cost
Machine Rate
(a) Old Rate
(6) New Rate
employed the
indirect
is
distributed over the various jobs, either on the basis of the hours
expended upon the jobs or else upon the basis of the cost
expended upon them. When the raw materials method
is employed the distribution is made on the basis of the cost of
raw materials entering into the various jobs. When the prime
cost method is used the basis is the combined labor and raw materials cost.
Under the machine rate method indirect is distributed by applying to each machine its proper burden of
indirect and then distributing this indirect on the basis of the
time during which the machine is occupied on a piece of work.
The Direct Labor Method. For a detailed discussion of these
methods the reader is referred to the treatises mentioned at the
end of this chapter. It will suffice to mention here some of the
advantages and defects of the various plans. The first two
methods mentioned have simplicity in their favor, but the cases
in which they serve as accurate bases for distribution of indirect
are not many.
Certainly, in but few instances is it true that the
proper amount of indirect applicable to an order is proportionate
to either the cost or the duration of the direct labor expended
on that order. Indeed, it is oftentimes the case that the comparative cost of labor on products requiring a great amount of
machine work is much smaller than on those requiring much hand
work, although the indirect applicable to such a job is naturally
greater because of the machine work.
The Raw Materials Method. Similar considerations invalidate the raw materials basis in most instances. In case of the
highest grade products of our factories raw material frequently
forms a rather small percentage of the total cost of the output;
of labor
of labor
MANUFACTURING ACCOUNTING
so that
it
may
259
applicable to
work done
of
of distributing indirect
may
in
CHAPTER XXXVIII
MANUFACTURING ACCOUNTING {Continued)
more or
less
is
accu-
when
cost,
The
factory.
Thus
number
of bulbs used.
260
MANUFACTURING ACCOUNTING
Idle
Machine Time.
However,
impossibiUty of keeping
all
it is
261
machines running
full
time,
all of
upon.
left
The question
arises,
how
burden
Here
two very
absolutely,
of idle time.
The other
theory,
advocated by CUnton H. Scovell, is to the effect that the undistributed balance of burden resulting from idle machinery is not
an element of cost of manufacture, but rather a general expense
or loss representing the penalty placed upon an organization
which is unable to keep its machinery running up to standard
full time.
This undistributed burden ought, therefore, to be
charged direct to profit and loss.^
The indirect for any given month is determined by an estiniate
based upon the indirect cost of previous months. As a consequence, when the supplementary rate plan is employed and the
whole of the estimated indirect is charged to the various orders
through the primary machine rate and the supplementary rate, it
may be found that the actual overhead for the month differs from
the estimated. Estimated overhead is employed because some
little time may be required to ascertain actual overhead.
When
actual overhead is determined an adjustment must be made for
it.
This then gives rise to a second supplementary rate, by means
of which the difference between the estimated and the actual
indirect is either charged or credited to the various orders, accordingly as the actual indirect is greater or smaller than the
estimated indirect.
'
'^
See the works of Messrs. Church and Scovill listed at the end of this
part.
* The difference between the actual and estimated indirect, if small, might
be added to the indirect of the succeeding month or if it is possible to delay
distribution of indirect until actual indirect for the month is learned, no such
undistributed balance occurs.
What follows in this chapter is said subject to
;
this qualification.
262
To
number
machine hours
month,
and that the total indirect applicable to that machine is estimated to be $720 for that month. Its rate per hour is, therefore,
720-7-360 or $2. But if idle time for the month for this machine
amounts to 60 hours, the unapplied portion of the estimated
burden will amount to 2 X 60 or $120. Further, let us assume
that in due time the actual indirect for this month is ascertained
to be $780, or $60 in excess of the estimated indirect.
To simplify matters for illustrative purposes assume further that the
machine's time during the month has been occupied exclusively
upon four order numbers. Below is shown the appearance of
the account for indirect and also the cost ledger accounts for the
four orders, after the indirect has been distributed, first by the
direct rate, secondly, by the first supplementary rate, and,
thirdly, by the second supplementary rate:
illustrate,
running
full
total
time,
is
360
of
for a given
General Ledger
Indirect, Dep't.
Actual Indirect
$780
A.
$G00
120
60
Direct rate
Supplementary
2nd Supplementary
1st
.,
$780
S780
Cost Ledger
Order No. 230 (70 hrs
Direct Rate
1st Supplementary
2nd Supplementary
Direct Rate
1st Supplementary
2nd Supplementary
1st Supplementary
2nd Supplementary
1st Suppementary
2nd Supplementary
hrs.)
$140.00
28.00
14 00
.
Direct Rate
hrs.)
200 00
40 00
20 00
Order No. 232 (70
Direct Rate
.)
$140.00
28.00
14 00
hrs.)
$120.00
24 00
12 00
.
time.
from
idle
MANUFACTURING ACCOUNTING
263
The " 1st supplementary" rate is secured by dividing the unapplied burden
resulting from idle time, $120, by the number of operating maof the actual over the estimated indirect.
chine hours for the month, 300, which gives, as the first supplementary rate per hour, $0.40. The "2nd supplementary" rate
The
above accounts.
Use
of Clearing Accounts.
would be either
Manufactuiing
To
$600.00
...
Indirect, Dept.
When
the
in the
amount
is
$600.00
of the first
supplementary
Manufacturing
To
determined
$120.00
Indirect, Dept.
Finally,
is
$120. 00
is
determined the
fol-
lowing entry
Manufacturing
To
Indirect, Dept.
$60 00
.
$G0.00
264
are
basis
charged
to
proper
accounts.
Thus
month the departmental
show the following charges:
departmental
Wages
'
These are merely put down thus for illustrative purposes. The
classification of such accounts on a departmental or a general
If, however, the above is
factory basis varies with conditions.
the accepted basis, then to transfer these delpit balances to the
To
Supplies, Dep't.
Maintenance, Dep't.
Wages
Lighting, Dep't.
To
of Janitors, Dep't.
To
K
K
To
distribute the various general factory expenses to the departmental indirect accounts.
The
some proper
basis;
MANUFACTURING ACCOUNTING
"Under the
old
265
costs seem low during periods of active production, while during periods
of curtailed production costs
all
of the
production, which
is
entirely
burden
is
dis-
Thus a varying
"contrary to the general practice stated above, the fact is that only a
is chargeable to the manufacturing cost of
made during
chargeable being the same percentage of the total burden, as the curtailed production is of the standard production. "*
General Ledger
Indirect, Dep't.
$780
Actual Indirect
Direct Plate
Profit
and Loss
Direct Rate
Direct Rate
X
Direct Rate
Direct Rate
'
180
$780
$780
Cost Ledger
Order No. 230 (7
$600
hrs.)
$140
Order No. 231 (100 hrs.)
$200
Order No. 232 (70 hrs.)
$140
Order No. 233 (60 hrs.)
$120
266
is
idle
machine time.
article is
suggested, or
direct or
will
if it
else
be used of
indirect.
made
in the Finished
Goods Ledger,
at cost price.
goods thus transferred during the month a summade in the General Journal and posted to the
of
mary entry is
proper controlling accounts, thus:
Finished Goods (controlling account)
To Manufacturing
Sale of Goods.
(controlling account).
credited,
while for the total monthly sales entries are made, crediting the
finished goods controlling account
and Loss
To
Finished Goods
and charging
profit
and
loss
MANUFACTURING ACCOUNTING
267
From this point the procedure is not dififerent from that of the
ordinary trading concern.'
Advantages of a Cost System. 1 As an Aid in Contract Work.
In determining the price at which he is wilhng to undertake the
execution of a piece of work, the experience with past costs is of
most value to a contractor, if accurate records have been kept.
When such records are non-existent price-making is haphazard
and hable to be conditioned more upon what a competitor may
Such procedure has
offer than upon a suitable margin of profit.
them by making
other kinds
When
all
is
it
possible to take
them
at times
when work
of
not pressing.
taxes,
it is
268
To
Any
discrepancy
CHAPTER XXXIX
MANUFACTURING ACCOUNTINGPRACTICE
Problem 1.
Following
Company
is
Purchases of
Inventories:
Raw Materials
Raw Materials
$14,500.00
2,100.00
1,900.00
1,271 40
8,999.25
Goods
in Process
Finished Goods
Wages
$18,128.40
Sales
312 00
Expease, factory
Discount on Purchases
Allowances to Customers
Rentals
General Expense
Insurance (current)
Cartage Out
348.00
187 40
.
340.00
411.41
418.00
144.00
188 00
Commissions
Notes Receivable
Accounts Receivable
Petty Cash
Cash in Bank
Factory:
5,000.00
5,890. 15
100.00
5,491 17
.
Tools
3,000.00
1,200 00
6,800. 00
9,700. 00
20,000 00
10,076.38
$58,252.78^ $58,252.^
The
Goods
$ 2,121 .50
10,100.00
4,040.00
in Process
Finished Goods
$16,261.50
last closed as of
The
for about three years.
Dec. 31, 1918, but nothing has been
269
270
shall
charged
off
follows
Mavufacturing Section
Cost
Manufacture
Balance,
Raw
Materials
Goods in Process
Finished Goods
S 2,100.00
1,900.00
1,271.40
Purchases
$ 5,271.40
14,400.00
to
$15,259. 15
$19,771.40
Less Inventories Dec. 31, '19:
Raw Materials
$ 2.121 .50
Goods in Process
10,100.00
Finished Goods
4,040.00
$16,261.50
Cost of
Raw
$ 3,509.90
8,999.25
Materials
Wages
Expense, factory
Rentals
Insurance
Depreciation: Tools
Drawings
Models
Machinery
312.00
340.00
418.00
600.00
and
280.00
800.00
$15,259.16
$15,259.15
..
MANUFACTURING ACCOUNTINGPRACTICE
271
Trading Section
Balance, Cost to Manufacture.. $15,259.15
Allowances to Customers
Cartage Out
Commissions
Balance, Trading
.$18,128.40
Sales
187.40
144.00
188 00
2,349 85
.
Profit
$18,128.40
$18,128.40
Profit
General Expense
Balance, Net Profit to Surplus
411.51
2,286.44
$2,349.85
Discount on Purchases
348.00
$2,697.85
$2,697.85
The balance
sheet follows:
Notes Receivable
Accounts Receivable.
Petty Cash
Cash
in
Bank
$20,000.00
9.700.00
Inventories:
Raw
2,121.50
10,100.00
4,040.00
Materials
in Process.
Finished Goods...
Goods
Toola
Lea<
R^.
for
Dep
Drawings
LeM
3,000.00
1,500.00
Add Net
Profit, 1919.
7556.38
2286.44
9,842.82
1,500.00
1,200.00
700.00
500.00
6,800.00
2,000.00
4,800.00
Machinery
Lea Res. for Dep.
$39,542.82
$39,542.82
The wasting
and
all
272
Raw
2.
The trial balance of the Williams-Allen ManuCompany, as at Dec. 31, 1919, is as follows:
Problem
facturing
$ 90,000.00
30,000.00
25,000.00
75,000.00
Materials, 12/31/18
in Process 12/31/18
Goods
Factory Wages
Sales
500,000.00
160,000.00
50,000.00
6,000. 00
*
2,000.00
3,000 00
1,000.00
26,000.00
.
60,000.00
42,000.00
7,000.00
220,000.00
135,000.00
20,000.00
Cash
Factory Building
Machinery
Tools
Capital Stock
Common
Preferred (6
200,000.00
100,000 00
36,000.00
100,000.00
% cumulative)
Surplus
Bonds
(1st
Mortgage)
$944.000.00
$944,000.00
Raw
$100,000 00
25,000 00
31,000. 00
Materials
Goods
in Process
Finished Goods
$156,000.00
all
wasting assets.
depreciation.
You
cost
an opinion
upon the value of the preferred stock, which has a par value of
$100 per share. Show how you arrive at this opinion. Submit
an income statement and a balance sheet.
CHAPTER XL
RELATION OF ACCOUNTING TO MANAGEMENT
Purpose of Accounts.
where the routine work
of creating
them
Too frequently
ends.
regarding accounts receivable and payable, inventories, uncollectible accounts, and all other pertinent financial data which
history of a concern's operations; it must also
information to the manager of such a character
as will enable him to deal efficiently with present and future
problems.
Information the Manager Needs.^ The problems which con-
compose the
supply
live
front the
manager
internal conditions
departmental
which
refer to strictly
efficiency, waste,
amount
of
turnover, and so on; and those which arise in connection with the
outer world
on.
He
all
18
273
274
vital tendencies.
Character of Reports.
cordial cooperation
is
Cost
systems sometimes
fail
because
skillful
control.
may
made continuing
made
as the latest
Expression by Percentages. Within certain limitations permay be employed to bring significant relationships and
changes before the mind. Being related to a common base of
100 they afford a better mode of comparison than do sums expressed in quantities of dollars, or other concrete units of measurecentages
ment.
Thus,
if
we
two sums
of
common
275
which follow.
Problem
of Price-making.
petition
and
is
still
make
a suitable
business customs,
ous factors
and so on
tions,
profit.
Even when
method
of fixing the
invested.
The
for
light,
fair
resulting
forth.
Profits
Based on Selling
Price.
Not only
is
there a likelihood
To
illustrate, let us
of
a commodity
276
$10 and that the merchant decides to sell it for $12.50. This
an increase of 25 per cent on the cost price but only 20 per cent
on the selling price. This means that if the merchant reckons
his operating expenses as a percentage of gross sales, which is
customary practice, while he at the same time figures his profits
as a percentage of cost of goods, he is working with two different
is
is
with
standards
Thus,
if
operation
amount
He
errs
which
is
is
ulti-
He
by reckoning
on cost and
his
Illustrated.
A merchant buys a commodity for
His operating expenses are 20 per cent of gross sales. He
wishes to make a net profit of 8 per cent.^ What should be the
The Problem
$1.
commodity?
Solution:
100
(20
$1
-^
72
+
=
8)
72
$1.39 Answer.
problems of a similar character may be solved by the followTo the operating expense add the net profit desired,
both expressed as percentage figures. Deduct this sum from
100 per cent. Divide the cost of the article by the difference.
Selling Price the Proper Basis.
The common error lies in the
failure to distinguish the selling price as the proper figure upon
which to base all percentages of expense and profit; so that sometimes an attempt is made to work both from the sales basis and
the cost basis. As has been well said, "many business men
seem to have persistently refused to acknowledge that any per cent
or to
of a smaller sum is a smaller per cent of a larger sum
put it concretely, that if 25 is 25% of 100 it is only 20% of 125
and 25% increase over cost is 20% profit on the selling price."
This leads to a consideration of the reasons for employing
sales instead of costs as a basis upon which to figure profits.
ReAll
ing rule:
to investment of capital.
277
no other single item bears such a significant relationship to the various activities of an enterprise. Upon
the amount of the sales depend all other functions and activities.
flection will reveal that
When
of
prise
made
is
Net
sales deter-
Why,
percentage of sales.
of cost?
The
significance of this
employed
is
the emphasis
To
it
He
The
He
assume that a
amounts to 18 per
illustrate,
reasons as follows
is
$1.50.
To
this
he must add 18
-f 10
To
Note the
selling price.
The
is $0.35, which
deducted from the selhng price, $1.92, leaves $1.57 to cover cost
and provide the net profit desired. The excess of $0.07 above
cost does not give the merchant a profit of 10 per cent
not even
on cost. The confusion arose from a failure to employ net sales
as the basis from which to compute all percentages.
Employing the rule given above we find that the correct selhng
price to provide 10 per cent net profit and cover expenses of 18
is
per cent
is:
100
- (18 + 10) = 72
^ 72 = %2m Answer.
$1.50
sell
at this price
may
be question-
profits.
is
effective.
When,
278
O
8'
o *
N M lO to
O)
r<
however,
much
in
data
the
detail
it
consist
is difficult
of
to keep
mind a
centages
relate
N
8h. m
00
r CI
la
ti4
o lo
The
make
proposition will
this clear.
sell-
o
c
U5 U5
go
us -<
e>s
t-
-I
ON
to (o o> e4
sggg
O
U5 lO
U3
herewith.
to OS to 05 eo
Tfi
115
*
00 to 00
1-1 CO 1-*
lO -H
year
the
go
o
sales
differ
00 t^ to to
o oo
g8
d
o
d
t*
' to
O K
to
'O
<
00 to
<<
U5
of
more years
any item
less
for
is
g
o o
purposes of comparison
they are referable to a
common
base.
Turnover.
of
Rate
of
Z>
"3
S:
Ed td _
-o
P^
o M
-S
S3
0! OS; Q
merchandise.
If
turnover
of the sale
on an aver-
a
o
two
nil.
CO
in
See page
287, for a graphic chart of the
same data. Percentages are valueor
unless
a
comparison
O *
in this
purchases
279
$6,000
20,000
Turnover
$26,000
4,000
$22,000
is
($6,000
h-
$5,000,
or 4.4.
Some
in
280
work proceeds,
will serve.
especially
It is
and
leaks,
and to
prevent unnecessary or extravagant expenditure. Work accomplished is compared with costs incurred in order to keep the trend
of these such that the anticipated profit will result when the work
is
finished.
Complete cost
lot or order
6.
Special
CHAPTER XLI
GRAPHIC CHARTS
Use
of Graphs.
Graphs serve to
and to make them more
Statistical tables are sometimes
vivid than do tables of figures.
so detailed and so complicated that only the most experienced
can interpret them adequately. Important tendencies are apt
to be overlooked.
We have found that expression by percentages
sometimes is preferable to expression in quantities of dollars
and cents; this is especially true when all items to be considered
are referable to a common base.
When, however, there are two
of
variables instead
one it becomes necessary to contrive some
other means of conveying an idea of the significance of their
constantly varying relationship to each other. Thus we frequently find that we must interpret numerous quantities relating to successive periods of time.
We desire to show their
relative weight and tendencies.
Graphs are especially suited to
by the use
emphasize tendencies and
to advantage
of graphic charts.
relationships
this purpose.
is
Thus we say that food prices have risen 100 per cent
over a period of five years. The price of food is the dependent
variable and time is the independent variable.
variable.
is
most important tendencies of a financial character are measured in terms of days, weeks, months, or years.
For example, we say that in one year net profits amount to 5%
on invested capital and in the next year to 6%. Here the dependent variable is the rate of net profit on invested capital and
variable, because
Principles of
Graph Construction.
281
For
is
a detailed discussion
282
It will
must be followed.
which follow :2
The
1.
Where
2.
that
it
more
likely ^to
left to right.
by hnear magnitudes
be misinterpreted.
as
Areas
The
4.
5.
from the
The
7.
left
8.
left
ruling.
F. J.
GRAPHIC CHARTS
plete as possible.
if
283
added
presentation
1.
Comparative
sales, for
two or more
years,
by months,
also
The same by
years.
4.
10.
Net
profits, dividends,
surplus,
by
years.
The
of the diagrams.'
clearly
XI-XV.
284
manager the
Of course he might
What
is
50
46
_.-.-
40
,.-'''
Xy
V
36
,Jor
4
s30
,'
^^^'
--V-J
-/
/
\lotbV)
-Sales
^%y
^y
^^ /
^ /o
'<^\^5x^
Jr
25
^
1
S 20
16
10
10
12
Months
Plate
I.
Monthly
sales of
in
year 1919.
after the
dition
if
total indirect?
If it
GRAPHIC CHARTS
285
method
this
is
and net
85
45
40
.--"*"
"'--
./"
36 ,^
=
&
30
<^ ^
<
26
o
\^
y^^
^[^
20
15
10
10
12
11
Months
Plate
II.
Monthly purchases,
remains constant.
increasing business.
S.
The same
is
Note
the
amount
still
more
As
sales
rapidly.
BIBLIOGRAPHY
Part VI.
Manufacturing Accounting
Chcrch, a. H. The Proper Distribution of Expense Burden.
1912.
New
York,
'
286
90
80
70
-^
^\
60
^50
30
/'
20
10
-"
.->
Tota^^
___
N^
40
^^
y^
~~
^ ^
~'
#1
/
yA
s 'in
K
..^
^il^jn ct
123456 789
10
11
12
Months
Plate
III.
Scovell, C. H.
1916.
Webner,
F. E.
Factory Costs.
New
York, 1911.
New
York,
GRAPHIC CHARTS
287
Management
Church,
The
A. H.
Management.
New
York,
1911.
Ennis, W. D.
Franklin, B.
CosttoMtfJ,
?
48
^h
^_
Dividends Declared
24
ansa
Sellinc Expeni
General Expense
^
/
___
"Iz
i,\*^
1S15^\
1914
Plate IV.
J^-^7
1916
Years"
1918
1919
0*i
Graphic Charts
Brinton, W. C.
New
York,
1914.
Secrist, Horace.
Warne,
F. J.
Business Statistics.
Chartography
Department Accounting:
E. P. and others.
MoxEY,
1913.
in
Ten
New
York, 1920.
Washington, 1919.
Lessons.
New
York,
"
APPENDIX A
REVIEW QUESTIONS
Chapter
1.
2.
3.
4.
is
6.
1.
2.
How
3.
What
4.
6.
7.
5.
are cash
and
is
Chapter
1.
How
2.
What
3.
4.
5.
6.
7.
8.
What
What
III
be subdivided? Why?
the Cash Journal?
not shown for each sale?
record?
is
an "account?"
is
10. Define
Chapter IV
1.
What
2.
How
is
do
losses
3.
Define "capital.
4.
What statement
should be
made up
books?
5.
What
is
288
APPENDIX
6.
7.
8.
9.
Chapter
1.
289
classified.
Distinguish between the functions of the Cash Journal and the Gen-
eral Journal.
2.
What
is
accounts'?
Chapter VI
3.
4.
1.
2.
is reall}'^
trial
balance of balances.
balance.
6.
What
6.
Why
7.
8.
9.
From
10.
is
What
is
Why
How
is
trial
balance
differ
from the
first trial
balance?
How
does the profit and loss account differ from the profit and loss
statement?
11.
12.
What
What
13.
the relation of the balance sheet and the profit and loss
is their value largely comparative?
Why
statement?
What
is
Chapter VII
3.
What
What
What
4.
Why
1.
2.
is
is a diary of events?
not charge furniture bought to "Purchases?"
6.
What
What
7.
When,
6.
a "stereotyped phrase?"
the purpose of the notes receivable account?
in practice, is posting done?
is
is
9.
Why
Chapter VIII
1.
2.
3.
4.
WTiy
Why
Why
19
is
is
290
Chapter IX
1.
What
is
A deferred charge?
How may interest periods
an accrual?
Define interest.
periods?
2.
differ
from accounting
4.
taxes?
6.
7.
What is
Chapter
I.
2,
8.
required?
Chapter XI
1.
How does capital in the economic sense differ from capital in the
accounting sense?
3. Distinguish between fixed and working capital.
4. How may depreciation cause financial trouble?
6. Why does it sometimes cause bankruptcy?
6. How may depreciation be counteracted?
7. What is a valuation reserve?
8. How may depreciation be charged without using a valuation reserve
account?
Explain.
9. Should the reserve be kept in cash?
10. Why is the depreciation reserve a clearing account?
II. What is normal depreciation?
How is it related to efficiency?
12. Explain the use of valuation reserves for bad debts.
2.
Chapter XII
1.
What would an
2.
Why
Why
Why
is
to year
not growing?
depreciation an expense?
is
is
Chapter XIII
1.
2.
desirable?
APPENDIX
3.
What
common
291
law partnerships?
8.
What
What
9.
How
7.
define a partnership?
Chapter XIV
1.
How
sole proprietor?
3.
4.
Why
2.
distribute interest
on investments when
accounting?
proportion to investments?
6. What is meant by the average investment for a given period?
it
How
is
found?
6.
7.
8.
Chapter
XV
Chapter XVI
1.
What changes
in
necessitate?
2.
What
is
3.
When
4.
What
is
6.
6.
7.
1.
What
2.
Why
8.
4.
6.
Chapter XVIII
1. Name the books ordinarily required in a system of accounts for a trading concern with numerous accounts payable and receivable.
2.
What
is
292
3.
4.
are charged?
check?
6.
nal?
7.
Why
How
XIX
Chapter
1.
What
What
What
is
6.
a voucher system?
a voucher?
Explain use of paid and unpaid vouchers' files?
What charges are made through the voucher register?
1.
What books
2.
3.
4.
is
is
Chapter
XX
6.
1.
When
2.
3.
4.
Chapter XXI
3.
What
What
1.
How
2.
What
3.
Is
2.
is
Chapter XXII
ledger?
it
is
usually desirable to open the profit and loss account in the private
Why?
Chapter XXIII
1.
2.
3.
4.
6.
6.
7.
8.
9.
1.
2.
XXIV
What
in instalments?
3.
4.
to bonds?
in
payment
of subscriptions?
APPENDIX
Chapter
293
XXV
How
1.
partnership
2.
3.
stock ?
4. Describe the process of conversion to the corporate form (a)
old books are continued; (6) when new books are opened.
when the
Chapter XXVI
2.
What
What
3.
1.
is
(o)
bonds?
when bonds
{h)
interest rate?
7.
8.
What
5.
6.
profit
and
is
premium
Chapter
W What
loss?
are
bonds issued
XXVH
in perpetuity?
4.
5.
Why
6.
What
2.
3.
Chapter XXVIII
1.
2.
3.
4.
What
6.
Chapter
XXIX
3.
4.
What
1.
2.
is
294
Chapter
1.
How
2.
What
3.
4.
6.
is
XXX
published reports?
6.
7.
Why
How
is
assets?
8. What are some of the most important items in the income statement
that deserve study?
9. What is the relationship between fixed charges and the margin of
profits?
How
How
11.
bonds?
Chapter
XXXI
studied?
3.
4.
6.
6.
7.
bonds?
WTiy
8.
What
9.
How
is this unusual?
remarkable about the funded debt of the D. L. & W.?
may the income statement of the U. S. Steel Corporation be
is
criticized?
10.
How
did the years 1914 and 1915 compare in prosperity for this com-
pany?
Chapter XXXII
1.
Why
business documents?
3.
8.
9.
APPENDIX
10.
How
11.
12.
What
What
13.
295
is liability
is
is
assets?
14.
How,
in such
16.
What
objection
bondholders protected?
be raised against the use of a sinking fund for
may
this purpose?
How may
16.
be reduced in Connecticut?
capital stock
Chapter
1.
What
XXXHI
When
3.
Should
4.
permissible to
all profits
unit?
5.
What
6.
When
7.
What
Chapter
XXXIV
How
2.
Why,
in
of space occupied
store?
6.
What
is
The administrative
section?
7.
WTiy
is
Chapter
XXXVI
2.
296
Chapter XXXVII
3.
4.
How
1.
2.
another?
5.
6.
7.
8.
trolled?
What
9.
Why
10.
manufacture?
11.
What
materials
is
method?
The prime
cost
The raw
method?
Chapter XXXVIII
1.
2.
3.
What
first
supplementary rate?
What
6.
1.
Why
4.
Chapter
idle
time cost?
Why?
XXXIX
counting?
Why
1.
2.
3.
4.
5.
What
efficiency?
is a budget?
How is it related to the accounts?
does a knowledge of costs aid in making contracts?
8. In reporting to the manager on internal conditions, what points should
be covered?
6.
What
7.
How
1.
Why
2.
In graphics, what
Chapter XLI
are graphs sometimes used to interpret statistics?
is
The dependent
variable?
3.
4.
What
INDEX
Balance
"Account;" defined, 16
Accounting; function of, 22: relation
to management, Ch. XL.
Accounting period; defined, 43
Accounts; a branch of economics, 1;
and credit system, 4; and
management,
counting,
5;
XXVI; how
23
work^ Ch. X;
theory of, Ch. IX.
"Accrued;" defined, 60-61
Accounts payable; controlling acAccruals;
interest
practice
classified,
173;
177-8;- issued in
marketing,
173;
167-8; redemption funds, 173-
4;
redemption
of,
Ch.
XXVII;
151-2; sold
at discount or premium, 168-9;
relation to stock,
count, 111
89-90
classes
on,
perpetuity,
count, 111
Assets;
of
Fi-
ples, 285
Bondholders; compared with stockholders, 152
Bonds; advisability of issuing, 153;
accounting for issues of, Ch.
5; relation
valuation,
144;
Ac-
Principles,
84^85;
Partnership Accounting, 104;
Special Applications of Princi-
to
Expansion
damental
of,
relation
188;
Ch.
VI;
mixed, defined, 19; nominal, de-
5;
of
Accounting Records,
lation to investing
114
Corporation
Bibliographies:
fined,
208;
XXXIII
Ch.
illustrated,
4;
Intel pretation
of,
arrangement in
ledger, 25, 27; as aid in competition, 3; as aid in price making,
3;
XXXII,
Chs.
sheet,
XXXIII; arrangement
paid out
of,
209-12; valua-
of,
fixed,
defined,
nature
of,
70;
invested,
69-70
Bad
161-2
debts;
Capital stock; liability on, 213; premium on, used to pay dividends,
297
222
INDEX
298
account;
stock
Capital
use
of,
180
Capital; working, defined, 70
of,
14r-15
defined, 148
Closing
partnerhips
entries;
ac-
XII
counts, 96-97
Columnar
journals, Ch.
XVI;
illus-
trated, 109
Common
XXV, XXVI,
XXIII, XXIV,
XVII
Corporation; accounting for bond
issues, Ch. XXVI; advantages
of,
149; open
and
147-148;
opening corporation books, Ch.
XXIV; opening entry, 155-7;
ownership transferred, 148-149;
possibilities of growth,
146;
records
close
peculiar
to,
185;
re-
of, 10,
22; rules
for, 11
Credit System;
advantages
of,
meaning
of,
for, 11
Deed
Depreciation; theory
of,
Ch.
XI
73-77
Dissolution;
of,
accotint,
97-99
Dividend; defined, 149, 183; accounting for, 184; and surplus,
183-4;
183;
declaration
kinds
of,
table as,
220-224; relation to
profits,
of,
149
loss,
8;
relation of to accounts, 4
'"Debit;"
42
Finished goods; transfers to, 266
Fixed capital; defined, 70
Fixed charges; and income
ment, 198
"Folio;" meaning of, 21
state-
INDEX
Functional classifications of transactions, 22; illustrated, Ch. V
Gains; significance
of,
23;
how
ac-
in
93,
in-
XLI
of, 198;
of proprietorship
Marine
Mercantile
Co. ; accumulated dividends,
150
Interpretation of ledger accounts,
Ch. VI
Inventories; and income statement,
International
198
Inventory (new); significance of, 3738
Inventory (old); significance of,
37-38
Investments; relation to accounts, 5
Journal, cash; function
Idle
7;
and partner-
bases of
prorating,
258;
Limited
Loss;
basis
cost,
of
proration
labor,
fiom expense,
how accounted
for,
15,
17;
of
to
ac-
significance of, 23
258;
basis
sources
of
of,
direct
Management;
relation
257;
liability,
distinguished
Losses;
259; proration on
loss,
Interest
47; in-
42
146
of,
12-13
of,
prime
14-15;
of,
Ch.
columnar, function of,
XVI; columnar, illustrated,
109; function of, 10, 16; general,
illustrated, 30; illustrated, 233
notes payable, 112; notes receivable, 112; simple form of,
9; subdivision of, 14
Journal entry; opening, 2425
ship,
Indirect;
299
to,
Ch.
XL
Manager; reports
to,
274
accounting procedure,
255; purchase of, 253
Chs.
Manufacturing accounting,
Materials;
of,
of,
185
defined,
19; 'ex-
plained, 37-38
calculations; discrepancies
170-1
38,
note.
Net
40-41
INDEX
300
Net
New
number
of,
Premium;
affects
depreciation, 78
and
profit
loss,
problem
Price-making;
19
Normal
275;
of,
relation to accounts, 3
XXI;
Ch.
practice,
XXII
92-94
Operating ratio; significance of, 204
Orders; production and plant, 255
" Other Income;" meaning of, 205
Overhead. See Indirect.
cribed, 2
Profit
and
subdivisions
loss;
Profit;
net, disp>osition
of,
accounted
for, 15,
Partnership accounting, Chs. XIIIXV; practice, Ch. XV; admission of partners, 99-100; closing
certained
and
margin
96-97;
entries,
bibliography,
of,
27-28
40, 41;
17;
how
how as-
distributed,
6;
need of
re-
199;
of,
of,
173-5;
serving, 200
Promoter; work of, 155
Purchases
37-39
146;
liability,
limitations
of,
on
dissolution,
90-91
Partnerships
Partnerships;
classified,
common
87
law, defined,
88
Payroll; accounting procedure, 256
Pennsylvania
account;
illustrated,
Raw materials;
Record
of
subscriptions;
use
of,
185
Register of transfers; use
of,
185
illustrated,
39
Reports to executive;
in
hem
Bethle-
4
Requisition; use
of,
255
of,
73-77
INDEX
Sales; net,
importance
of,
275
181-2;
division
of,
unappro-
182;
priated, 182
functional classification
trated,
XVI
Specialized ledgers; described,
108
and
priated,
Surplus,
197
301
payment
of,
157;
181;
of,
22;
of, illus-
cial,
II,
III;
recording,
practice,
and purpose
36; na-
35-36;
purpose of, 37
Trust deed (see Deed of trust).
Trustee; sinking fund, 177-179
Trust fund theory, 213
Turnover; importance of, 278-279
ture
of,
Wages
XX
accrued; illustrated, 62
>- -h*^
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